Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 1 - Medicare levy surcharge
1.1 The Taxation Laws Amendment (Private Health Insurance Incentives) Bill 1996 (the Bill) amends the Income Tax Assessment Act 1936 (the Act) to supplement amendments made by the Medicare Levy Amendment Bill (No. 2) 1996 (the Surcharge Bill). The Surcharge Bill imposes an increased amount of Medicare levy (referred to here as 'surcharge') on people with high incomes who do not take out private patient hospital cover.
1.2 The amendments will:
- ensure that present Medicare levy exemptions for prescribed persons do not apply to the surcharge where any member of a family is not a prescribed person and is not covered by private patient hospital cover; and
- make a minor technical amendment.
1.3 The amendments in relation to the surcharge will apply from 1 July 1997, in respect of the 1997-98 and subsequent years. The minor technical amendment will apply from 1 July 1994.
1.4 The Government announced in the 1996-97 Budget that a 1 per cent Medicare levy surcharge is to be imposed on single people and families with taxable incomes above stated thresholds that do not have private hospital cover through private health insurance. The surcharge is part of a package of measures designed to encourage taxpayers to retain or take out a private health insurance policy.
1.5 The surcharge operates as an additional amount of Medicare levy payable rather than as a separate charge and, consequently, is based largely on existing Medicare levy provisions. However, there are several important differences between the application of the normal rate levy and the increased rate. They involve certain persons who are prescribed persons, that is, persons who are exempt from Medicare levy (eg Defence Force members). The differences are:
- a dependant of a prescribed person may, for normal rate Medicare levy purposes, be treated as not being a dependant of the person in certain circumstances - this is not the case with the surcharge where a dependant maintained by a person is always treated as a dependant; and
- a prescribed person with a non-prescribed dependant is treated, for normal rate Medicare levy purposes, as being a prescribed person only for half of the particular period - with the surcharge, such a person is treated as not being a prescribed person at any time during the period and therefore potentially liable for the surcharge for the full period.
1.6 The definition of dependant in relation to prescribed persons also differs in some minor respects to the definition of dependant used for the purposes of the surcharge.
1.7 The amendments to the Act are necessary to give effect to the different scope of the surcharge and to ensure consistency between the definitions of dependant in relation to the surcharge and prescribed persons. The Bill also makes some other minor technical changes.
1.8 The first principal change is contained in new section 251V . It is concerned with prescribed persons who, under existing Medicare levy provisions, have a child or children who are not treated as dependants for the purposes of those provisions. Certain existing Medicare levy provisions operate only in respect of prescribed persons to impose half levy where they have a dependant who is entitled to benefits under Australia's health system. However, where a dependant pays the levy in his/her own right or another person pays levy on behalf of a specific dependant, that dependant is not treated as a dependant of the prescribed person for levy purposes. The result is that the prescribed person remains fully exempt from the Medicare levy when, otherwise, he/she would have been liable for half levy.
1.9 A further provision qualifies the definition of a dependant in relation to a prescribed person to exclude a full-time student between 16 and 25 years of age where the student earns more than $1,785.
1.10 The provisions deeming a dependant not to be a dependant for existing Medicare levy purposes are subsections 251R(4), (5), (6B), (6C) and (6D). New section 251V operates to provide that where one of those subsections would otherwise have deemed a person not to be a dependant (new subsection 251V(1)) then, for the purposes of the surcharge only, the subsection does not apply (new subsection 251V(2)) . [Item 4 of Schedule 1]
1.11 New section 251V is necessary to place prescribed persons on the same footing as taxpayers generally in relation to liability to the surcharge. Subject to high and low income threshold tests, the surcharge is imposed on any taxpayer who benefits under Australia's health system and who does not have private patient health insurance coverage for himself/herself and for all his/her dependants.
1.12 The second principal change is contained in new section 251VA . This new section applies only where a person who, under subsection 251U(3), is a prescribed person for one-half of a period because he/she has a dependant who is not also a prescribed person. Subsection 251U(3) exists to impose effectively half Medicare levy on a person, who otherwise is exempt from the levy, where the person has a dependant who benefits under Australia's health system.
1.13 New section 251VA operates to provide that, for surcharge purposes, a person to whom subsection 251U(3) applies is deemed not to be a prescribed person for the whole period rather than the half period as presently provided by subsection 251U(3). This is necessary to ensure that the surcharge applies to all persons, including prescribed persons, for the full time that they have dependants who are not covered by private health insurance. New subsection 251VA(1) applies to a person only where subsection 251U(3) also applies to the person or would apply where another person is deemed to be a dependant. It makes it clear that the new section applies in situations where subsection 251U(3) applies directly in relation to a dependant and where, indirectly, it would have applied because under new section 251V a person is taken to be a dependant and this would have resulted in the person being a prescribed person for only half the period under subsection 251U(3). [Item 4 of Schedule 1]
1.14 The new surcharge is not to be payable under the provisional tax system. It is to be payable on assessment (although provision is to be made for an employee taxpayer to be able to choose to provide for a surcharge liability through the tax instalment deduction system). Paragraph 221YCAA(2)(c) concerns the calculation of provisional tax and is amended to ensure that the surcharge is not taken into account in that calculation. [Item 1 of Schedule 1]
1.15 Existing subsection 251S(1A) concerns Medicare levy and eligible termination payments and refers to section 159SB. Section 159SB was replaced by section 159SA with effect from 1 July 1994, but the reference was not changed at the time. The opportunity has been taken to make the change. [Item 2 of Schedule 1]
1.16 Section 251T provides for certain persons to be exempt from liability for the Medicare levy. A reference to new sections 8B, 8C, 8D, 8E, 8F and 8G has been inserted in section 251T to ensure that the exemption provided there applies only in relation to normal rate Medicare levy and not the surcharge which is imposed on a different basis. [Item 3 of Schedule 1]