House of Representatives

Medicare Levy Amendment Bill (No. 2) 1996

Explanatory Memorandum

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

Chapter 1 - Medicare levy low income exemption thresholds

Overview

1.1 Schedule 1 of the Bill will amend the Medicare Levy Act 1986 (the Act) to increase the Medicare levy low income exemption thresholds ('low income thresholds') for individuals, married couples and sole parents. It will also increase the upper exemption shade-out thresholds as a result of the increased low income thresholds and the change of Medicare levy rate from 1 July 1996.

Summary of the amendments

Purpose of the amendments

1.2 The measure will amend:

sections 7 and 8 of the Act to raise the low income thresholds for individuals, married couples and sole parents;
subsection 7(2) of the Act to raise the exemption shade-out threshold for individuals; and
subsection 7(4) of the Act to increase from $450 to $454 for the 1996-97 year of income only, the upper exemption shade-out threshold for trustees of certain trust estates liable to pay the Medicare levy.

Date of effect

1.3 The amendment to the low income thresholds will apply from 1July1996. The amendment to the exemption shade-out threshold for certain trustees will have effect for the 1996-97 year of income.

Background to the legislation

Low income thresholds

1.4 The Act makes provision for individuals, certain trustees, married couples and sole parents entitled to a sole parent rebate, and who have low taxable incomes (or family incomes), to be exempt from the levy. Except for trustees, the existing exemption thresholds are to be increased by a factor based on forecast CPI. The exemptions are shaded-out for a limited range above the low income thresholds.

Shading out of the exemption

1.5 The Medicare Levy Amendment Act 1996 amended section 6 of the Act to increase the rate of levy from 1.5 per cent to 1.7 per cent for the 1996-97 year of income, reverting to 1.5 per cent in subsequent years of income. As a result of the rate change, the threshold at which the exemption shades-out for individuals has to be increased. The shade-out threshold is amended again upon the rate reverting to 1.5 per cent.

1.6 No amendment is made here to the family exemption shade-out threshold. This because that threshold is formula based and the relevant component was amended when the Act was amended to change the rate of levy.

1.7 The rate increase also necessitates an amendment to subsection 7(4). An amendment is required to raise the upper exemption shade-out threshold for trustees paying Medicare levy on the net income of a trust estate assessed under section 99.

Explanation of the amendments

Medicare levy low income exemption thresholds

1.8 The low income thresholds for individuals, married couples and certain sole parents will be increased for 1996-97 and subsequent financial years.

1.9 Section 7 of the Act exempts individuals with taxable incomes at or below the low income threshold from any liability for the Medicare levy. It also applies the levy at a reduced rate for individual taxpayers with taxable incomes within a certain range over which the exemption is shaded-out.

1.10 The level of the individual low income threshold is to be increased from $12,870 to $13,127. [Item 1 of Part 1]

1.11 A reduced levy will be payable if an individual's taxable income exceeds $13,127 but does not exceed $14,346. [Item 2 of Part 1]

1.12 Section 8 of the Act exempts from the Medicare levy a person whose family income is below the family low income threshold and who satisfies either of the following:

the person is married (includes a de facto relationship) on the last day of the year of income; or
the person is entitled to a sole parent rebate or a rebate for a housekeeper in his or her assessment in respect of the relevant year of income.

1.13 Family income is the taxable income of the person or, if the person was married on the last day of the year, the taxable income of the person and person's spouse.

1.14 The level of the 'family income threshold' in subsection 8(5) of the Act is to be increased from $21,718 to $22,152 [item 4 of Part 1] . The threshold will continue to be increased by a further $2,100 for each dependent child or student. (The child or student must be one in respect of whom the taxpayer or spouse would have been entitled to a dependant rebate in that year had those rebates been continued.)

1.15 Subsection 8(2) reduces the rate of levy payable by a married couple, or a sole parent, where they are not entitled to exemption because the family income exceeds the family low income threshold by a small or moderate amount. In such circumstances, the amount of levy otherwise payable is reduced in accordance with the formula specified in the subsection. The effect of the subsection is to limit the levy payable by these taxpayers to 20 per cent of the amount of family income which exceeds the family low income threshold. The formula provides for the shade-out of the family low income threshold over the family income range $22,153 to $24,209 (family with no dependent children).

1.16 Subsection 8(6) of the Act places a restriction on increasing the 'family income threshold' on account of certain dependants in respect of a year of income. The restriction applies only where the taxpayer was not a married person on the last day of the year of income. In these circumstances the 'family income threshold' is not increased on account of a dependant unless a family allowance was payable to the taxpayer in respect of the dependant. The reference in the subsection to the amount of $21,718 referred to in the definition of 'family income threshold' is to be increased to $22,152. [Item 5 of Part 1]

Exemption shade-out thresholds

1.17 The exemption shade-out threshold for individuals contained in subsection 7(2) of the Act is increased from $13,913 to $14,346 for the 1996-97 year of income only. [Item 2 of Part 1]

1.18 The increased exemption shade-out threshold of $14,346 will then reduce to $14,191 from 1 July 1997 when the Medicare levy rate reduces from 1.7 per cent to 1.5 per cent. [Item 7 of Part 2]

1.19 Item 3 of Part 1 increases, for 1996-97 year of income only, the upper exemption shade-out threshold amount for the payment of the Medicare levy by a trustee of a trust estate assessed under section 99 from $450 to $454. This results from the increased rate of levy of 1.7 per cent payable for that year.

1.20 Item 8 of Part 2 changes that increased threshold amount back to $450 from 1 July 1997 when the levy rate reverts to 1.5 per cent.

1.21 The increased low income exemption thresholds and exemption shading-out ranges for 1996-97 will be as shown in the following table:

1996-97 MEDICARE LEVY LOW INCOME EXEMPTION THRESHOLDS AND EXEMPTION SHADING-OUT RANGES
Category of taxpayer No levy payable if taxable income (family income) does not exceed (previous figures) Reduced levy if taxable income (family income) is within the range (inclusive) Ordinary rate of levy payable where taxable income (family income) exceeds (previous figures)
Individual taxpayer $13,127 ($12,870) $13,128 - $14,346 $14,346 ($13,913)
Married taxpayer* with the following children and/or students (family income) (family income) (family income)
0 $22,152 ($21,718) $22,153 - $24,209 $24,209 ($23,478)
1 $24,252 ($23,818) $24,253 - $26,504 $26,504 ($25,749)
2 $26,352 ($25,918) $26,353 - $28,800 $28,800 ($28,019)
3 $28,452 ($28,018) $28,453 - $31,095 $31,095 ($30,289)
4 $30,552 ($30,118) $30,553 - $33,390 $33,390 ($32,560)
5 $32,652 ($32,218) $32,653 - $35,685 $35,685 ($34,830)
6 $34,752** ($34,318)** $34,753** - $37,980*** $37,980*** ($37,100)***

or taxpayer entitled to a sole parent, child/housekeeper or housekeeper rebate.
• *
add $2,100 for each extra child.
• **
add $2,295 for each extra child (previously $2,270).

1.22 The amendments made by items 1, 4 and 5 of Part 1 apply for the financial year commencing on 1 July 1996 and all later years. [Subitem 6(1) of Part 1]

1.23 The amendments made by items 2 and 3 of Part 1 apply for the 1996-97 financial year only. [Subitem 6(2) of Part 1]

1.24 The amendments made by items 7 and 8 of Part 2 apply for the financial year commencing on 1 July 1997 and all later years. [Item 9 of Part 2]


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