Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)
The purpose of this memorandum is to explain the main features of three income tax Bills.
The first Bill - the Income Tax Assessment Amendment Bill (No. 2) 1976 will effect changes to provisions of the Income Tax Assessment Act relating to the taxation of pensions and concessional rebates and will provide for automatic indexation of the amounts of certain concessional rebates in future years.
The proposals in the Bill are outlined below.
- At present pensions paid to persons below age pension age are exempt from tax while those paid to persons of pensionable age (men who are aged 65 or over and women who are aged 60 or over) are, with some exceptions (e.g., war pensions) subject to tax. This Bill will withdraw the exemption of certain pensions paid to persons below age pension age, and also for payments by way of unemployment and sickness benefits. The pensions which will become subject to tax, irrespective of the age of the person to whom they are paid are:
- Widows' Pensions
- Supporting Mothers' Benefits
- Service pensions, other than those equivalent to invalid pensions.
- As part of a package of measures designed to achieve a better system of family assistance this Bill will withdraw entitlement to concessional rebates for children and students. Another part of the package substantially increases Child Endowment payments. Although entitlement to rebates for children and students will be withdrawn the Bill provides for retention of the part of the zone allowances for residents of isolated areas, servicement serving in certain areas overseas and persons serving with United Nations forces, that is related to the rebates now allowed for such dependants.
- The Bill also provides that where entitlement to other concessional rebates depends on entitlement to rebates for maintenance of such dependants, the latter rebates will be "notionally" maintained for that purpose. Other concessional rebates in this class are those available to a sole parent, for a housekeeper and for medical and education expenses.
- The Bill will also increase the amounts of a number of concessional rebates as one of the steps in implementing the indexation of personal income tax. In some cases, the increase in the amounts of rebates will be greater than that resulting from indexation. This applies to the rebate for a spouse, a daughter-housekeeper, a housekeeper and to a sole parent.
- The Bill provides that specified concessional rebates are to be automatically increased in future years broadly in line with increases in the Consumer Price Index but excluding increases attributable to indirect tax increases. The increase in rebatable amounts for 1976-77 resulting from indexation is 13 per centum. Although there will no longer be entitlement to rebates for children and students, the amounts of the rebates previously allowable for these dependants are being indexed for the purpose of the amounts included in zone rebates on account of such dependants and for the purpose of establishing entitlement to other rebates which now depend on entitlement to rebates for such dependants - see notes on Concessional Rebates above.
- The Bill will set out the basis for calculation of provisional tax for 1976-77. Since this will be based on income of the 1975-76 income year, the provisional tax will be calculated at the rates that applied for that year and not at the indexed rates that will apply to 1976-77 incomes to compensate for the inflationary increase in income. The provisional tax will, however, reflect the proposed increases in concessional rebates for dependants, housekeeper and sole parent, and the withdrawal of rebates for children and students.
The second Bill - Income Tax (Rates) Bill 1976 - declares the rates of income tax payable by individuals and trustees for the financial year 1976-77 and subsequent financial years. It is designed as a standing measure but the rates it declares will apply in a financial year only where an Act imposing tax for that year so provides. The provisions of the third Bill will provide the authority for those rates to apply in the 1976-77 year.
The main features of the second Bill are:
- The Bill retains the progressive rates scale of seven steps and the same marginal tax rates that were applicable for the 1975-76 financial year but the income ranges to which each marginal rate applied for that year have been adjusted for indexation by a 13 per centum increase. This reflects the increase in the average level of the Consumer Price Index for the 12 months ended 31 March 1976 over its average level in the preceding year, as reduced by the effects of indirect taxes. These adjustments to the income ranges will mean that the same average rate of tax will be payable by many taxpayers in 1976-77 as was payable in 1975-76, despite the fact that their taxable incomes have increased.
- The Bill contains provisions which will, from year to year, automatically adjust the general rates declared in it. The adjustment will be made by reference to upward movements in the Consumer Price Index. This automatic adjustment will apply for the 1977-78 financial year and subsequent financial years.
The third Bill - the Income Tax (Individuals) Bill 1976 - will impose tax in respect of income derived during the 1976-77 income year by individuals and trustees at the rates declared in the second Bill.
As indicated above, the general rates of tax declared by that Bill vary from those applicable for the 1975-76 year by reason of an indexation factor having been taken into account in determining the income ranges that apply for each marginal rate of tax. The minimum marginal rate of 20 per centum which applies for 1975-76 to the first $2,000 of taxable income will apply for 1976-77 to the first $2,260 of taxable income. There is a corresponding widening of income ranges higher up the tax scale. The maximum marginal rate of 65 cents will apply for 1976-77 to the excess of taxable income over $28,250 rather than to the excess over $25,000 as in 1975-76.
Notes on Clauses
The main features of this Bill have been referred to in the introductory pages of this memorandum. The following notes relate to the individual clauses of the Bill.
This clause formally provides for the short title and citation of the amending Act and of the Principal Act as amended.
Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act. By this clause, it is proposed that the amending Act shall come into operation on the day on which it receives the Royal Assent. This will enable early implementation of PAYE arrangements giving effect to indexation of the personal income tax.
These three clauses will amend provisions of the Principal Act relating to zone and equivalent rebates. Under each of the provisions concerned - sections 23AB, 79A and 79B - a rebate is allowable of a fixed amount plus an additional amount equal to a proportion of the sum of the dependants, sole parent and housekeeper rebates to which a taxpayer is entitled in the relevant year of income. These clauses will ensure in each case that this additional amount will not be affected by the proposed withdrawal of rebates for children and students to be effected by clause 7.
Clause 3 will amend sub-paragraph 23AB(7)(a)(ii) of the Principal Act which provides that the additional rebate to which a person serving with an armed force under the control of the United Nations is entitled is an amount equal to 25 per centum of the sum of the rebates (if any) to which he is entitled under sections 159J, 159K and 159L.
Section 159J is being amended by clause 7 of the Bill to withdraw for 1976-77 and subsequent years the concessional rebates now available under the section for children less than 16 years of age and student children. This is to be done by the insertion of a new sub-section - sub-section (1A) - in section 159J.
The amendment being made by clause 3 will ensure that, despite the withdrawal of the child and student rebates for the purposes of section 159J, those rebates will, in effect, be regarded as still in existence for the purpose of calculating the rebate available under section 23AB to a person serving with a United Nations force.
Since, by clause 13 of the Bill, the amounts of child and student rebates "notionally" retained for the purposes of section 23AB are, along with the other dependant rebates that are not being withdrawn, to be indexed for 1976-77, the rebate available for that year under section 23AB will be increased accordingly.
Clauses 5 and 6 will make amendments to sections 79A and 79B of the Principal Act, i.e., in relation to the Zone A and Zone B rebates and equivalent rebates to members of the defence forces serving in certain overseas localities, on the same lines as the amendments to section 23AB proposed by clause 3.
This clause will amend section 23AD of the Principal Act, which sets out the circumstances in which pensions paid under social service and repatriation legislation are subject to, or exempt from, tax.
In broad terms, the position under the present law is that pensions paid to persons below age pension age, and some pensions paid to persons of age pension age (e.g., war pensions), are exempt from tax, while other pensions paid to persons of age pension age (men who are 65 or more and women who are 60 or more) and to wives (not over 60) of men of age pension age are subject to tax.
By this clause, the following pensions, which at present are subject to tax only when paid to persons of age pension age, will be made subject to tax irrespective of the age of the person to whom they are paid:
- Widows' Pensions
- Supporting Mothers' Benefits
- Service Pensions other than those equivalent to invalid pensions
Unemployment and sickness benefits are also to be subject to tax for 1976-77 and subsequent income years.
Additionally pension or benefit for children, and rent allowance, paid to widows, supporting mothers and service pensioners of less than age pension age will, like the corresponding amounts paid to persons of age pension age, continue to be exempt from tax.
Sub-clause (1) of clause 4 will omit definitions of two terms - "excepted payment" and "excepted pension" from sub-section 23AD(1) of the Principal Act and substitute new definitions of the terms.
The proposed amendments will have the effect of excluding from tax exemption the pensions and benefits referred to above that are to be subject to tax irrespective of the age of the person to whom they are paid.
Sub-clause (2) will amend the definition of "wife's pension" in sub-section 23AD(1) of the Principal Act. The amendment relates to a wife's pension payable under the Repatriation Act and is technically required in consequence of amendments to that Act.
This clause proposes the amendment of section 159J of the Principal Act in two respects.
Paragraph (a) of clause 7 will insert a new sub-section - sub-section (1A) - in section 159J which will withdraw entitlement to concessional rebates in respect of persons included in Class 3 or Class 4 in the table set out in sub-section 159J(2), that is, in respect of children less than 16 years of age (not being students) and students.
As previously mentioned, the withdrawal of these rebates is linked with increases in child endowment in new arrangements proposed for assistance to families. The withdrawal of these rebates will not affect other provisions of the Principal Act which depend on entitlement to them - see the notes on clauses 3, 5, 6, 9, 11 and 12 of the Bill.
Paragraphs (b), (c), (d) and (e) of clause 7 will amend the amounts of rebates allowable in respect of the several classes of dependants set out in the table in sub- section 159J(2) of the Principal Act. The amounts of the rebates are to be increased as part of the implementation of indexation of personal income tax. For certain of the dependant classes, however, the amounts of the rebates will be increased by more than the indexation factor of 13 per centum applicable in relation to the 1976-77 income year. The existing rebate amounts, and those proposed are:
|Parent of taxpayer or spouse||400||452|
|Child under 16 (not being a student)|
|- 1 child||200||226|
|- other children||150||170|
While the entitlement to rebates for children and students is to be withdrawn, these classes will be retained in the table in sub-section 159J(2). The other provisions of section 159J relating to partial rebates, e.g., where a dependant has a separate net income above the permitted level or where more than one person contributes to the maintenance of a dependant, are also to continue to apply in respect of the two classes of rebate as if they had not been withdrawn.
By this means it will be possible to ascertain the amounts of rebate in respect of children or students to which a taxpayer would have been entitled if the rebates had not been withdrawn by sub-section 159J(1A). This is necessary for the purposes of the zone and equivalent rebates and to establish entitlement to rebates for sole parents, housekeeper, medical and education expenses - see the notes on clauses 3, 5, 6, 8, 9, 11 and 12 of the Bill.
The indexation provisions will also operate to increase the "notional" rebate amounts for children and students for these purposes, as well as those for other classes of dependants - see the notes on clause 13 of the Bill.
Paragraph (f) of clause 7 will increase the level of separate net income that does not require reduction in the amount of the rebate that would otherwise be allowable in respect of a dependant. At present the rebate otherwise allowable in respect of a dependant is not reduced unless the dependant's separate net income exceeds $150, and it is reduced by $1 for each $4 by which the dependant's income exceeds $150. This permitted level of separate net income is to be indexed upwards to $170 for the 1976-77 income year, and will automatically be indexed in line broadly with movements in the Consumer Price Index in future years.
The new level, and the proposed indexation of it, are to apply in determining the "notional" rebates for children, and the entitlement to such rebates, for the purposes of the zone and allied rebates and the rebates for sole parents, housekeeper, medical and education expenses.
Section 159K of the Principal Act, which will be amended by this clause, provides for the allowance of a rebate to a taxpayer who is entitled to a rebate in respect of a child under 16 years of age or a student (up to 25 years of age) and has the sole care of that child or student. The rebate is primarily for the benefit of single, widowed or divorced parents caring for a child without the aid of a daughter-housekeeper or housekeeper.
Paragraph (a) of clause 8 will amend the requirement, contained in sub-sections (1) and (2) of this section, that the taxpayer be entitled to a rebate in respect of the maintenance of a child under 16 years of age or a student. As the entitlement to such rebates is being withdrawn by clause 7, paragraph (a) will, in effect, substitute the requirement that the taxpayer would have been entitled to a relevant rebate if it had remained in existence. This amendment will ensure that a taxpayer will not be deprived of a sole parent rebate because of the proposed withdrawal of entitlement to rebates for children and students.
By paragraph (b) of clause 8, the amount of the sole parent rebate will be increased from $200 to $350 for the 1976-77 income year. This increase is greater than that which would have resulted from application of the indexation factor for 1976-77 of 13 per centum. The indexation provisions of clause 13 of the Bill will ensure that the amount of the sole parent rebate will automatically be indexed in future years.
This clause will amend section 159L of the Principal Act, which provides for the allowance of a rebate to a taxpayer for a housekeeper. For a rebate to be allowable, the housekeeper must be wholly engaged in keeping house in Australia for a taxpayer and in caring for one or more classes of dependants, including a child or student less than 16 years of age, not being a child of the taxpayer, in respect of whom the taxpayer is entitled to a rebate under section 159J.
Paragraph (a) of clause 9 will amend sub-section (1) of section 159L to ensure that the proposed withdrawal of entitlement to rebates for children and students will not result in the loss of a rebate for a housekeeper to which a taxpayer would otherwise have been entitled. This will be done by altering the requirement that the taxpayer be entitled to a rebate for a child or student under 16 years of age to a requirement that an entitlement to the relevant rebate would have existed but for its withdrawal by sub-section (1A) of section 159J - see the notes on clauses 7 and 8 of this Bill.
Paragraph (b) of clause 9 will increase the amount of the housekeeper rebate from $400 to $500 for 1976-77. This is greater than the amount which would have resulted if indexation only had applied. By the amendment proposed by clause 13 of the Bill, the amount of the housekeeper rebate will be automatically indexed in future years.
Section 159N of the Principal Act, which is to be amended by this clause, provides, in effect, for a rebate of tax of an amount equal to the greater of $540 or 40 per cent of the sum of the amounts that qualify as rebatable amounts under sections 159P to 159X of the Principal Act, e.g., medical expenses, life insurance premiums, education expenses, etc. Accordingly, the rebate under this section will exceed $540 where the total of the rebatable amounts exceeds $1,350. By this clause, the minimum rebate under section 159J will be increased by the indexation factor of 13 per centum from $540 to $610 for the 1976-77 income year, and the amendment proposed by clause 13 of the Bill will ensure automatic indexation of this amount in future years. Where the total of the rebatable amounts in 1976-77 exceeds $1,525, the rebate under section 159N, at 40 per cent of that total, will be greater than $610.
These clauses propose the amendment of sections 159P and 159T of the Principal Act, which provide for the treatment of medical and education expenses respectively as rebatable amounts in respect of which a rebate is allowable under section 159N (see notes on clause 10).
Section 159P includes in the rebatable amount under that section medical expenses paid by a taxpayer in respect of a dependant, which is defined to include a person in respect of whom the taxpayer is entitled to a rebate under section 159J. At present this includes children under 16 years of age and students, the entitlement to a rebate for whom will be withdrawn by the amendments to the Principal Act proposed by clause 7. Clause 11 will amend the definition of dependant in section 159P to include children and students in respect of whom the taxpayer would have been entitled to a rebate if the rebates for children and students had not been withdrawn. Medical expenses paid by the taxpayer in respect of those classes of dependants will, therefore, continue to be treated as rebatable amounts.
Clause 12 will amend the definition of student in section 159T of the Principal Act to the same effect, so that the rebatable amount under that section will continue to include education expenses paid by the taxpayer in respect of children and students on the same basis as if the relevant maintenance rebates had not been withdrawn.
This clause will insert a new section 159Z in the Principal Act which will ensure that the various amounts of rebates referred to in the section will be automatically increased in future years in line with prescribed increases in the Consumer Price Index, excluding increases attributable to increases in indirect taxes.
Sub-section (1) of the new section 159Z lists the various rebate amounts that are to be so indexed in the definition of the term "relevant amount". These are:
|paragraph (a)||Spouse; daughter-housekeeper||$500|
|Parent of taxpayer or of spouse||$452|
|Invalid relative, student and 1 child under 16 (not a student)||$226|
|Other children under 16 (not student)||$170|
|(Also included in this paragraph is the permitted separate net income level of $170)|
|paragraph (b)||Sole parent rebate||$350|
|paragraph (d)||General concessional rebate||$610|
As already explained, the retention and indexation of the rebates for students and children are only for the purposes of determining eligibility for other rebates. No rebates are to be allowed for 1976-77 and subsequent years for the maintenance of this class of dependant.
Sub-section (1) of section 159Z will also include a definition of the term "relevant year of income", which is defined as the year of income commencing on 1 July 1977 or a subsequent year of income. By sub-section (2) all of the relevant amounts will automatically be increased for each relevant year of income, that is for 1977-78 and future income years where, in broad terms, there is an increase in the Consumer Price Index.
Sub-section (2) of section 159Z provides that each of the relevant amounts, that is, the amounts of rebates referred to in the notes on sub-section (1) above, are to be increased for 1977-78 and subsequent income years, where the indexation factor is greater than 1.
The indexation factor is to be ascertained in accordance with sub-section (3) of section 9 of the Income Tax (Rates) Bill 1976 (see the notes on that Bill). In broad terms, the index factor for 1977-78 will be ascertained by dividing the sum of the Consumer Price Index numbers for the four quarters included in the twelve months ending on 31 March 1977 by the sum of the index numbers for the four quarters included in the twelve months that ended on 31 March 1976.
The rebate amounts set out in sub-section (1) will be increased for 1977-78 by the factor so ascertained or by such a lesser factor as is prescribed. A lesser factor, not being less than 1, may be prescribed where the indexation factor calculated in the above manner has been affected by increases in indirect taxes, or where the indexation factor in the preceding year was less than 1. The latter would reflect a fall in the Consumer Price Index and since it is not intended to reduce the rebate amounts when that occurs, it will be necessary to exclude from a subsequent indexation factor any increase corresponding to the earlier decrease.
Paragraph (a) of sub-section (2) of section 159Z provides that, for the first year of income for which the rebate amounts are to be increased by indexation, the indexation factor is to be applied to the amounts specified in sub-section (1). By paragraph (b) of sub-section (2), the indexation factor for subsequent years will be applied to the rebate amounts as increased by earlier applications of the indexation factor.
Sub-section (3) of section 159Z will provide for rounding of the rebate amounts derived by application of the indexation factor. Paragraph (a) of sub-section (3) will provide that where the amount so derived consists of a number of dollars and cents, the cents, if less than 50, are to be ignored, while paragraph (b) will provide that if the cents amount to 50 or more, the amount derived will be rounded up to the next higher dollar.
The purpose of this clause is to make the PAYE tax instalment deduction system capable of application to the unemployment and sickness benefits that, by clause 4 of the Bill, are being made liable to income tax.
The clause will amend section 221A of the Principal Act, that contains definitions used in the PAYE deduction provisions. Subject to other features of the PAYE arrangements, deductions are required to be made from any amount that falls within the definition of "salary or wages" contained in section 221A. Pensions are among the items now included in the definition. Where income is not subject to the PAYE provisions it is liable to provisional tax.
Clause 14 will add to the definition of "salary or wages" another category in respect of which PAYE deductions may be made. The additional provision refers to payments that are subjected to tax by reason of section 23AD of the Principal Act and will, in particular, cover the benefits or allowances that, by clause 4 of the Bill, are to be listed in section 23AD as amounts to become assessable income for 1976-77 and subsequent income years. The amounts referred to there include unemployment and sickness benefits.
Under existing PAYE arrangements, deductions are not required to be made from "salary or wages" where the recipient has lodged with the person or authority making the payment an appropriate rebate claim and the amount of the payment is less than a particular amount. In 1975-76 this amount was $46 for a person without dependants. It will be a slightly higher amount in 1976-77.
This clause amends section 221YB(3) of the Principal Act which specifies that provisional tax for a year is not payable unless the Act declaring the rates of tax for that year provides that the provisional tax is to be payable. Because the Act declaring the rates of tax will in future not be an annual Act but will be a standing measure supplemented by an annual Act imposing tax, the clause amends the sub-section (3) of section 221YB, with the effect that provisional tax will not be payable unless the annual Act imposing tax declares it to be payable.
This clause amends section 221YC(2) of the Principal Act which contains authority for the making of regulations to vary the amount of provisional tax for a year in a case where the rates of tax for the year concerned are to be higher or lower than those for the preceding year. The amendment will make it clear that regulations so varying the amount of provisional tax will only need to be made if that course is appropriate in the circumstances.
The purpose of this clause is to set out the basis on which provisional tax for 1976-77, to be notified in a notice of assessment based on income of 1975-76, will be calculated.
Except where provision is made to the contrary, either in an Act or in a regulation made under sub-section (2) of section 221YC of the Principal Act, the amount of provisional tax in respect of a year of income is, at base, the amount of tax payable on income of the preceding year of income. The effect of clause 17 will be to vary this rule in relation to 1976-77 provisional tax, in the light of proposed changes in the range and amounts of rebates for dependants.
Provisional tax for 1976-77 to be included in a notice of assessment based on 1975-76 income will be the amount of tax for 1975-76 adjusted for the withdrawal of child rebates and for the increases in other dependants rebates and in the zone and allied rebates, where they are relevant. 1976/77 provisional tax will not take into account the indexed rates of tax and the indexed general rebate proposed for 1976-77.
However, where a taxpayer exercises the right under section 221YDA of the Principal Act to have provisional tax for 1976-77 based on an estimate of taxable income for 1976-77, the tax will then be calculated having regard not only to the abovementioned changes in dependants rebates, but also the indexed rates of tax and indexed general rebate. Application of all the various tax rules as now proposed for 1976-77 would, in those circumstances, be appropriate, because the provisional tax would be calculated on the basis of estimated 1976-77 income, that is, on a basis of income related to that year and not to the previous year.
This clause sets out that the various amendments are first to apply in relation to income of the year of income commencing on 1 July 1976. Automatic indexation will of course first apply in 1977-78.
For technical reasons, indexation of the personal tax system requires a departure from past practices. It has been customary for there to be one enactment to impose and declare the rates of tax payable for a financial year by taxpayers generally. The last such enactment was the Income Tax Act 1975.
The Income Tax (Rates) Bill 1976 will provide for the declaration of standard rates of tax to apply in respect of income derived by individual taxpayers and by trustees during the 1976-77 income year and later years of income.
The Bill makes provision for the general rates of tax set out in it, which will be applicable to most individual taxpayers, to be automatically indexed each year by reference to movements in the Consumer Price Index.
The rates of tax declared by the Bill will apply in a financial year only where a Bill imposing tax for that year so provides. The Income Tax (Individuals) Bill 1976, the main provisions of which are discussed later in this memorandum, proposes the imposition of the rates to be declared by this Bill for the 1976-77 financial year. Legislation to declare and impose the rates of tax applicable for 1976-77 to taxpayers other than individuals and trustees, i.e., companies and superannuation funds, will be introduced at a later date.
The provisions of the Bill are comparable, in many respects, with provisions contained in the Income Tax Bill 1975 so far as they relate to individuals and trustees and the following notes are confined to the main provisions of the Bill that differ in effect from like provisions in that Act.
This clause declares the ordinary rates of tax payable by persons other than companies (except a company in the capacity of a trustee) and superannuation funds, i.e., by individuals and trustees (other than a trustee of a superannuation fund) for the 1976-77 and subsequent financial years. The rates of tax are set out in schedules to the Bill.
The general rates of tax, applicable to most individuals, are declared by sub-clause (1) and set out in Schedule 1 to the Bill. That schedule retains the progressive rates scale of seven steps and the same marginal rates that first applied in 1975-76 but the income ranges to which each marginal rate applied in 1975-76 have been adjusted for 1976-77 by indexation. The adjusted income ranges included in Schedule 1 have been increased by 13 per cent above the income ranges that applied for 1975-76. This will mean that the average rate of income tax payable for 1976-77 by an individual taxpayer whose taxable income in 1976-77 increases in line with the indexation factor of 13 per cent will be the same as the average rate of tax paid for 1975-76.
The figure of 13 per cent reflects the increase in the average of the Consumer Price Index, as published by the Australian Statistician, for each 3 months of the 12 months ended 31 March 1976, over the average of the Consumer Price Index for each 3 months of the preceding 12 months, but excluding increases attributable to indirect taxes.
The changes to the scale are set out in the following table :
|Taxable Income Range||Marginal Rate||1975-76||1976-77||( (per centum)|
|Not exceeding $2000||Not exceeding $2260||20|
Sub-clauses (2), (3) and (4) and the associated Schedules 2, 3 and 4 to the Bill will declare the new rates of tax in the cases to which each Schedule applies.
Primary producers to whom the averaging provisions of the Assessment Act apply will be liable for tax at the rates declared by sub-clause (2), as set out in Schedule 2. The effect of Schedule (2) is that the first $16000 of taxable income will be taxed at the lower of the average rate based on the general rates applicable to the person's average income and the average rate applicable to a taxable income of $16000.
In consequence of the proposed indexation of the general rates of tax, Schedule 2 differs in effect from its 1975-76 counterpart in two respects. The average rate of tax applicable to an income of $16000 will be reduced from its 1974-75 level of 36 cents in the dollar to 34.12375 cents in the dollar and the tax at general rates on a taxable income of $16000 will be reduced from its 1975-76 level of $5760 to the lower level of $5459.80.
Sub-clause (3) declares the rate of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors and inventors) of the Assessment Act. This is set out in Schedule 3 to the Bill. As Schedule 3 applies by reference to the rates in Schedule 1, the changes in the general rates will apply automatically in these cases.
Sub-clause (4) declares that the rate of tax payable by a trustee in pursuance of section 98 (broadly, income to which a minor beneficiary is presently entitled) or section 99 (income to which no beneficiary is presently entitled) of the Assessment Act is to be determined by Schedule 4. Although this Schedule has not been varied from its 1975-76 counterpart, the proposed alterations to the general rates of tax will flow through to these cases, since Schedule 4 specifies that the rates of tax fixed by Schedules 1, 2 and 3 are applicable in assessments under section 98 and section 99.
Sub-clause (5) declares the rate of further tax payable pursuant to section 94 of the Assessment Act where there is included in the taxable income any amount of income to which that section applies, i.e., "uncontrolled partnership income" less the deductions specified in sub-section (10) of section 94.
A person is said to derive uncontrolled partnership income if, being a partner in a partnership, he or she does not have the real and effective control of the relevant share of the partnership income. A person under the age of 16 at the end of the year of income of a partnership is deemed not to have the real and effective control of a share of partnership income except to the extent that, in the opinion of the Commissioner, the share would constitute reasonable remuneration by way of salary or wages if services rendered by the person to the partnership had been performed by an employee.
As was the case in 1975-76, sub-clause (5) imposes further tax on income to which section 94 applies at a rate equal to 50 per cent reduced by the average ordinary rate of tax applicable to the taxpayer's total taxable income. The average ordinary rate of tax is determined for this purpose as being ordinary tax payable divided by the total taxable income. It is expressly provided by sub-clause (5) that the ordinary tax payable is to be the tax before allowance of any rebate or credit to which the taxpayer is entitled except any concessional rebate allowable under sub-section 159N(2) or paragraph 159N(3)(b) of the Assessment Act, i.e., any part of the general concessional rebate not matched by actual expenditure.
Sub-clause (6) declares the rate of further tax payable pursuant to section 94 of the Assessment Act where the taxpayer is a trustee liable to be assessed and to pay tax under section 98 or section 99 of that Act. Where any concessional rebate is allowed under sub-section 159N(2) or paragraph 159N(3)(b) in the assessment of a trustee liable to tax under section 98 (broadly, income to which a minor beneficiary is entitled), that rebate will be taken into account in the process of determining the further rate of tax payable by the trustee in the manner described above in a case to which sub-clause (5) applies. A trustee liable to tax under section 99 of the Assessment Act (income to which no beneficiary is presently entitled) will not be entitled to the general rebate of tax.
Sub-clause (7) retains at 50 per cent the rate of tax payable by a trustee liable to tax pursuant to section 99A of the Assessment Act.
This clause provides for the income ranges in the general rates scale declared by the Bill to be automatically indexed to a prescribed extent for income years subsequent to 1976-77.
In broad terms, the technical scheme of indexation provided by the clause requires an indexation factor to be determined for each income year by dividing the sum of the quarterly Consumer Price Index numbers for the 12 months which ended on 31 March preceding the income year by the sum of the index numbers for the corresponding period preceding the immediately preceding income year.
In this way the primary indexation factor in respect of each income year will be based on upward movements in the Consumer Price Index during the 12 months ending on 31 March of the previous income year.
The Consumer Price Index numbers published for each quarter by the Australian Statistician are to be used in determining the factor. Indexation is to apply where the factor reflects an upward movement in the index. Provision is made for the factor to be reduced by the part of it attributable to indirect taxes. Where such an adjustment is made, the adjusted factor is to be prescribed by regulations but otherwise the sub-clause provides for the factor to be published in the Gazette before the commencement of the year of income. Details of the various provisions of the clause are explained in the following notes.
Sub-clause (1) defines various references used throughout the clause, including the relevant Consumer Price Index numbers.
Sub-clause (2) requires each of the figures for the income ranges that appear in the general rates scale declared by the Bill (or, for income years subsequent to the 1977-78 year, those figures as previously adjusted for indexation in accordance with the sub-clause) to be multiplied each year by the factor determined in accordance with sub-clause (3), or where a lesser factor is prescribed, by that lesser factor. This will only apply, however, where the factor is greater than 1 - that is, there will be no adjustment for a downward movement in the relevant Consumer Price Index. The figures as so adjusted will become the figures for the income ranges in the general rates scale for the year of income for which the adjustment has been made.
Sub-clause (3) sets out how the indexation factor referred to in sub-clause (2) is to be determined. It is, in effect, to be the number ascertained by dividing the sum of the Consumer Price Index numbers (as defined in sub-clause (1)) for each quarter of the 12 months ended 31 March that precedes the commencement of the relevant year of income by the sum of the corresponding numbers for each quarter of the 12 months ending on the previous 31 March.
Sub-clause (4) authorises the making of regulations prescribing a factor (not being a factor less than 1) to be used for purposes of the section - i.e., the "lesser factor" referred to in sub-clause (2).
Sub-clause (5) specifies that in prescribing a factor by regulations regard shall be had to both downward movements in the relevant Consumer Price Index in a preceding year and the effects of indirect taxes on the determination of the indexation factor in accordance with sub-clause (3). Thus, although there will be no indexation factor adjustment in respect of the following year of income for a downward movement in the relevant Consumer Price Index, that downward movement may be taken into account in determining the indexation factor to be applied in respect of a later year of income.
Sub-clause (6) is the provision requiring notification in the Gazette of the indexation factor determined in accordance with sub-clause (3), unless a lesser factor has been prescribed pursuant to sub-clause (4).
Sub-clause (7) provides for the rounding to the nearest whole dollar where an amount determined by application of the indexation factor contains a fraction of a dollar.
Clause 10 of the Bill formally states that the rates declared by the Bill apply for the financial year 1976-77 and all subsequent financial years.
This Bill will impose the tax to apply in respect of income derived by individuals and by trustees during the 1976-77 income year. It is complementary to the Income Tax (Rates) Bill 1976, which declares the rates of tax to apply to such taxpayers. Together with the commentary elsewhere in this memorandum in relation to the latter Bill, the following notes refer to the main provisions of the Bill which differ in practical effect from the relevant provisions of the Income Tax Act 1975.
Sub-clause (1) of this clause formally imposes income tax payable by individuals and trustees for the 1976-77 financial year at the rates declared by the Income Tax (Rates) Bill 1976. As explained in more detail in the notes on that Bill, the general rates it declares incorporate an indexation factor adjustment and differ to that extent from the general rates that apply for 1975-76.
The other sub-clauses of the clause contain provisions common to the Bills which, for previous financial years, have imposed and declared the rates of tax payable. These provisions exclude from the scope of the imposition clause withholding tax (sub-clause (3)), and taxable incomes derived by individuals and certain trust estates which are less than specified minimum amounts (sub-clause (4)). The minimum amounts remain unchanged from those applicable for the 1975-76 year, at $1,040 in the case of individual taxpayers and trust estates in respect of which the trustee is liable for payment of tax under section 98 of the Income Tax Assessment Act, and at $416 for a trust estate where the trustee is liable for payment under section 99 of the Assessment Act.
This clause operates to levy the tax imposed by clause 5 of the Bill only in respect of the 1976-77 financial year and, unless the Parliament otherwise provides, for the 1977-78 financial year. This will mean that the rates set out in the Income Tax (Rates) Act 1976 are to be levied and payable for the 1976-77 financial year. Those rates, as automatically indexed according to the provisions of the Income Tax (Rates) Act 1976, will apply for the 1977-78 financial year unless the Parliament otherwise provides.