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Senate

Taxation Laws Amendment Bill (No. 6) 2000

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
This Memorandum takes account of amendments made by the House of Representatives to this Bill as introduced.

General outline and financial impact

CDEP Scheme Participant Supplement

Schedule 1 to this Bill amends the Income Tax Assessment Act 1936,the Taxation Administration Act 1953 and the Income Tax Rates Act 1986 to provide for the same income tax treatment of the CDEP Scheme Participant Supplement as the equivalent payment made to Newstart and Youth Allowance recipients involved in labour market programs. Recipients of the CDEP Scheme Participant Supplement will be eligible for a beneficiary rebate in respect of that payment. The payment will also be subject to the pay as you earn and pay as you go withholding systems.

Date of effect: The amendments will apply to payments made on or after 11 November 1999 and to assessments for the 1999-2000 year of income and all later years of income.

Proposal announced: The introduction of the CDEP Scheme Participant Supplement was announced in the 1998-1999 budget.

Financial impact: The amendments will have an insignificant revenue impact.

Compliance cost impact: Compliance costs will be minimal.

Exempting value received from GST Direct Assistance Certificates

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to ensure that GST direct assistance certificates are exempt from income tax that may arise from the receipt or redemption of the certificates.

Date of effect: The amendments apply to the 1999-2000 and 2000-2001 income years.

Proposal announced: This measure has not been previously announced.

Financial impact: The measure is expected to cost the revenue $70 million over the 1999-2000 and 2000-2001 income years.

Compliance cost impact: Nil.

Medicare levy surcharge

Schedule 3 to this Bill amends the Medicare Levy Act 1986 and A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 to ensure that an appropriate level of private patient hospital cover is held to avoid the imposition of the Medicare levy surcharge. These amendments will ensure that high income earners cannot avoid paying the Medicare levy surcharge by purchasing a low cost hospital product.

Date of effect: 1 July 2000.

Proposal announced: 24 May 2000.

Financial impact: Negligible.

Compliance cost impact: Minimal.

Summary of regulation impact statement

Regulation impact on business

Impact: Low.

Main points:

Health funds will face information dissemination costs to existing and new members.
Those funds that have in the past attracted new high income earners to high front-end deductible hospital insurance policies, will, in the future, be less able to do so.

Chapter 1 - CDEP Scheme Participant Supplement

Outline of Chapter

1.1 This Bill will amend the Income Tax Assessment Act 1936 (ITAA 1936),the Taxation Administration Act 1953 (TAA 1953) and the Income Tax Rates Act 1986 (ITRA 1986) to provide for the same income tax treatment of the Community Development Employment Projects (CDEP) Scheme Participant Supplement as the equivalent payment made to Newstart and Youth Allowance recipients involved in labour market programs.

Background to the legislation

1.2 The Further 1998 Budget Measures Legislation Amendment (Social Security) Act 1999, which received Royal Assent on 11 November 1999, provided CDEP scheme participants with a new supplement. The CDEP Scheme Participant Supplement is paid at the rate of $20 per fortnight and is designed to provide an equivalent payment to that received by Newstart and Youth Allowance recipients involved in labour market programs.

1.3 The proposed amendments will ensure that the CDEP Scheme Participant Supplement receives the same income tax treatment to the equivalent payments received by Newstart and Youth Allowance recipients.

Summary of new law

1.4 The following amendments will be made to the ITAA 1936:

paragraph (a) of the definition of 'rebatable benefit' and paragraph (b) of the definition of 'rebatable pension' in subsection 160AAA(1) will be amended so that the CDEP Scheme Participant Supplement will be beneficiary rebatable;
paragraphs 202CB(6)(a) and 202CE(7)(a), which cover the quotation of tax file numbers (TFNs) on employment declarations and TFN declarations, will be amended to ensure that recipients of the CDEP Scheme Participant Supplement are treated in a similar fashion to recipients of other similar Government benefits; and
new paragraph (h) in the definition of 'salary or wages' in subsection 221A(1) will be inserted to make CDEP Scheme Participant Supplement payments subject to the current pay as you earn (PAYE) withholding arrangements.

1.5 The following technical amendment will be made to the ITRA 1986:

to exclude the CDEP Scheme Participant Supplement from paragraph (c) of the definition of 'eligible pensioner' in subsection 16(1).

1.6 The following amendment will be made to the TAA 1953:

new paragraph 12-110(1)(d) will be inserted to make CDEP Scheme Participant Supplement payments subject to the new pay as you go (PAYG) withholding arrangements.

Comparison of key features of new law and current law
New law Current law
Recipients of the CDEP Scheme Participant Supplement will be entitled to a beneficiary rebate on the amount they receive under subsection 160AAA(3) of the ITAA 1936. In the absence of amendments to provide for the specific income tax treatment of the CDEP Scheme Participant Supplement, recipients would be entitled to a pensioner rebate under subsection 160AAA(2) of the ITAA 1936.
The CDEP Scheme Participant Supplement will be subject to the current PAYE and the new PAYG withholding arrangements. In the absence of amendments to provide for the specific income tax treatment of the CDEP Scheme Participant Supplement, recipients may be liable to the PAYG instalment arrangements.

Detailed explanation of new law

What is the income tax treatment of the CDEP Scheme Participant Supplement?

1.7 The CDEP Scheme Participant Supplement, which is paid under Part 3.15A of the Social Security Act 1991, is income according to ordinary concepts. Therefore the payment is presently assessable under section 6-5 of the Income Tax Assessment Act 1997.

1.8 The amendments to the definitions of 'rebatable benefit' and 'rebatable pension' in subsection 160AAA(1) will ensure that payments of the CDEP Scheme Participant Supplement will be subject to the beneficiary rebate under subsection 160AAA(3) on the same basis as equivalent payments made to Newstart and Youth Allowance recipients involved in labour market programs. [Schedule 1, items 1 and 2, subsection 160AAA(1)]

1.9 As a consequence of the beneficiary rebate being extended to the CDEP Scheme Participant Supplement, a technical amendment is required to paragraph (c) of the definition of 'eligible pensioner' in subsection 16(1) of the ITRA 1986. The exclusion of the CDEP Scheme Participant Supplement from the definition of 'eligible pensioner' will ensure that CDEP participants, who are not residents for the full year of income, will have their tax-free threshold pro-rated under section 20 of the ITRA 1986. [Schedule 1, item 6, subsection 16(1)]

Will the CDEP Scheme Participant Supplement be subject to withholding?

1.10 The CDEP Scheme Participant Supplement will be subject to the current PAYE and the new PAYG withholding arrangements on the same basis as equivalent payments made to Newstart and Youth Allowance recipients involved in labour market programs.

Amendments to the PAYE provisions

1.11 This Bill proposes to insert new paragraph (h) in the definition of 'salary or wages' in subsection 221A(1) of the ITAA 1936 to make payments of the CDEP Scheme Participant Supplement subject to the PAYE arrangements. [Schedule 1, item 5, subsection 221A(1)]

Amendments to the PAYG provisions

1.12 This Bill replaces section 12-110 in Part 2-5 of Schedule 1 to the TAA 1953 as a consequence of the insertion of new paragraph 12-110(1)(d) which provides for payments of the CDEP Scheme Participant Supplement to be subject to the PAYG withholding arrangements. [Schedule 1, item 7, paragraph 12-110(1)(d)]

1.13 As a consequence of the CDEP Scheme Participant Supplement being subject to the withholding arrangements, the rules covering the quotation of TFNs on employment declarations and TFN declarations also require amendment. Paragraphs 202CB(6)(a) and 202CE(7)(a) of the ITAA 1936 are being amended to have the same TFN quotation rules for recipients of the CDEP Scheme Participant Supplements as that applying to Newstart and Youth Allowance recipients. [Schedule 1, item 3, paragraph 202CB(6)(a), item 4, paragraph 202CE(7)(a)]

Application

1.14 The amendments will apply to payments made on or after 11 November 1999 and to assessments for the 1999-2000 year of income and all later years of income. [Schedule 1, item 8]

Chapter 2 - Exempting value received from GST Direct Assistance Certificates

Outline of Chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt any income attributable to GST direct assistance certificates from income tax.

Summary of the amendments

Purpose of the amendments

2.2 The purpose of the amendments is to ensure that the value of GST direct assistance certificates is exempt from income tax which may arise from the receipt or redemption of the certificates.

Date of effect

2.3 The amendments apply to the income years 1999-2000 and 2000-2001.

Background to the legislation

GST direct assistance certificates

2.4 The Government is providing redeemable direct assistance certificates to small and medium businesses and community sector bodies to aid in the implementation of GST. The certificates have a maximum value of $200 and are issued by the GST Start-Up Assistance Office to eligible enterprises which register for GST by 31 May 2000. An enterprise may redeem the certificate with a registered supplier in exchange for goods and services that will assist with the implementation of GST, for example, computer software or accounting services.

Assessable income

2.5 Subsection 6-1(1) of the ITAA 1997 provides that assessable income consists of ordinary income and statutory income. Ordinary income is defined in section 6-5 as income according to ordinary concepts, for example, salary or wages, or proceeds from carrying on a business. Statutory income is defined in section 6-10 as amounts that are not ordinary income but are included in assessable income by the operation of a provision of the law about assessable income. Section 10-5 lists particular classes of assessable income that are not ordinary income, for example, capital gains. A net capital gain is included in assessable income by section 102-5.

2.6 Exempt income is not assessable income under section 6-15. Exempt income is an amount of ordinary income or statutory income that is expressly made exempt by a provision of the ITAA 1997 or another Commonwealth law. Division 11 lists classes of exempt income and Division 51 specifies amounts of ordinary income and statutory income that are exempt income.

Ordinary income

2.7 If a GST direct assistance certificate is a benefit that can be turned to pecuniary account, the value of the certificate would be assessable as ordinary income to a taxpayer engaged in the conduct of a business. In FC of T v Cooke & Sherden
80 ATC 4140;
10 ATR 696 the Full Federal Court said (at 4148; 704) that a benefit to be enjoyed by a taxpayer will often be turned to pecuniary account if the benefit be given up, or if it be employed in the acquisition of some other right or commodity. Although the certificate cannot be exchanged for cash, it may be argued that as the certificate is used in acquiring products or services from registered suppliers, it may be a benefit which can be turned to pecuniary account. If so, the certificate would be assessable as ordinary income to a taxpayer engaged in the conduct of a business.

Statutory income

2.8 Section 15-10 provides that assessable income includes a bounty or subsidy that is received in the course of carrying on a business and that is not assessable as ordinary income. Where the certificates are provided by the Government to small businesses to assist them with the implementation of GST, it might be argued that the value of the certificates, if of a pecuniary nature, may be assessable as bounties or subsidies.

2.9 It could also be argued that the taxpayer receives a payment when the certificate is redeemed in that the certificate is used to pay part or all of the expenditure incurred on the GST related item. If so, when the certificate is redeemed the taxpayer may receive a bounty or subsidy which would be assessable under section 15-10.

Capital gains and losses

2.10 When an eligible enterprise receives a GST direct assistance certificate, the recipient acquires the rights contained in the certificate on the happening of CGT event D1. When the certificate is redeemed, CGT event C2 happens. The taxpayer makes a capital gain if the capital proceeds from the ending of the asset exceed the cost base of the asset (subsection 104-25(3)).

2.11 If the payment received on redemption of the certificate were assessable as ordinary income or statutory income, section 118-20 would apply to reduce the capital gain by the amount of assessable income.

Explanation of the amendments

Exempt income

2.12 Schedule 2 to this Bill inserts new section 51-60 in Division 51 (exempt amounts) of the ITAA 1997. New section 51-60will exempt ordinary income and statutory income from income tax for the 1999-2000 and 2000-2001 income years where the income is attributable to a certificate issued by the GST Start-Up Assistance Office, that is, a GST direct assistance certificate. [Schedule 2, item 2]

2.13 GST direct assistance certificates are issued by the GST Start-Up Assistance Office in the Department of the Treasury. The certificates have a maximum value of $200 which may be used by the recipient to purchase goods or services for the implementation of GST.

2.14 The effect of new section 51-60 will be that any income arising from a GST direct assistance certificate, regardless of the nature of that income, will not be assessable. For example, if the income from the certificates is ordinary income, it is expressly exempt from tax under newsection51-60. Likewise, if the income is assessable as a bounty or subsidy - which is statutory income - it is exempt from tax.

2.15 The table in section 11-15 is being updated as a consequence of new section 51-60 [Schedule 2, item 1] . The amendment will guide GST direct assistance certificate recipients to the new section 51-60.

Capital gains and losses

2.16 New section 118-14 is inserted in Division 118 (capital gains and losses - exemptions) of the ITAA 1997. New section 118-14 will operate to disregard a capital gain or capital loss made in the 1999-2000 or 2000-2001 income years from the redemption of a GST direct assistance certificate. [Schedule 2, item 3]

Chapter 3 - Medicare levy surcharge

Outline of Chapter

3.1 Schedule 3 to this Bill will amend the Medicare Levy Act 1986 (MLA 1986) and the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 (the ANTS (MLS - FBT) Act) to ensure that:

an appropriate level of private patient hospital cover is held by a person in order to be exempt from the Medicare levy surcharge (the surcharge); and
high income earners have an incentive to use the private health system when hospital treatment is required.

Background to the legislation

3.2 The surcharge was introduced to encourage people to take out policies that provide private patient hospital cover.

3.3 Certain policies which are currently available have an amount (a front-end deductible or excess) which is required to be paid by the policy holder in respect of private patient hospital expenses. Some of these policies offer high front-end deductible amounts with premiums that are lower than the surcharge that would be payable if no private patient hospital cover was held.

3.4 High income earners who purchase a high front-end deductible with an annual excess greater than $500 for a single contributor or $1,000 for all other contributors after 24 May 2000 will cease to be excluded from the surcharge from 1 July 2000.

Summary of new law

Purpose of the amendments

3.5 The purpose of the amendments is to ensure that an appropriate level of private patient hospital cover is held in order to be exempted from the surcharge.

3.6 This is achieved by inserting a new qualifying condition for an applicable benefits arrangement, for both single and all other contributors, into both the MLA 1986 and the ANTS (MLS - FBT) Act. An applicable benefits arrangement will only apply if the front-end deductible or excess is:

$500 or less where only one person is covered by the policy (single contributor); or
$1,000 or less where more than one person is covered by the policy (all other contributors).

Comparison of key features of new law and current law
New law Current law
An applicable benefits arrangement is one within the meaning of section 5A of the National Health Act 1953, to which paragraph 5A(1)(A) of that Act applies, and where the front-end deductible or excess is $500 or less for single contributors, or $1,000 or less for all other contributors. An applicable benefits arrangement is one within the meaning of section 5A of the National Health Act 1953, to which paragraph 5A(1)(A) of that Act applies.

Explanation of the amendments

A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999

Applicable benefits arrangement

3.7 Item 1 will insert a definition of 'covered', such that a person will be covered by an insurance policy that provides private patient hospital cover if they satisfy the conditions of new subsection 4. [Schedule 3, item 1, subsection 3(1)]

3.8 Item 2 will repeal the definition of 'provides',asthis definition is no longer required due to the new definition of 'covered'. [Schedule 3, item 2]

3.9 Item 3 repeals section 4 of the ANTS (MLS - FBT) Act and replaces it with new section 4 of ANTS (MLS - FBT) Act. This new section will amend the existing interpretation of an applicable benefits arrangement in the ANTS (MLS - FBT) Act by inserting a new qualifying condition. This new qualifying condition will place a cap on the amount that a private patient hospital cover policy can have as a front-end deductible or excess. [Schedule 3, item 3, subsections 4(2) and 4(5)]

3.10 For a single contributor, the front-end deductible or excess will be capped at an annual amount of $500. For all other contributors, the front-end deductible or excess will be capped at an annual amount of $1,000. Where the front-end deductible or excess exceeds these amounts, it will be a 'high front-end deductible or excess' and the policy will not be an insurance policy that provides private patient hospital cover. [Schedule 3, item 3, paragraphs 4(2)(b) and 4(5)(b)]

3.11 A contributor to a policy of this type will only be liable to the surcharge from 1 July 2000 if the policy was taken out after 24 May 2000. [Schedule 3, item 3, paragraph 4(3)]

3.12 A contributor to a policy with a front-end deductible or excess which is higher than the new front-end deductible limit, who took out the policy on or before 24 May 2000, will remain exempt from the surcharge until such time that they cease to maintain continuous membership of the policy.

3.13 For example, a contributor who is approved by a health fund to suspend their policy will remain exempt from the surcharge, as suspension does not cease continuous membership.

3.14 However, a contributor who ceases to contribute to the same high front-end deductible policy after 24 May 2000, only to recommence contributions to a high front-end deductible policy at a later date, will be subject to the surcharge from 1 July 2000 or the date they ceased continuous membership of the original front-end deductible policy, whichever is the latter.

Example 3.1 Robert is single and has contributed to a high front-end deductible policy from 1 July 1999. On 1 October 2000 Robert decides to take out an alternative policy which has an annual front-end deductible of $200. On 1 September 2001 Robert reverts to a high front-end deductible policy.Robert is exempt from the surcharge for the 2000-2001 year of income, as he contributed to a high front-end deductible policy held on or before 24 May 2000 and to an applicable benefits arrangement that provides private patient hospital cover from 1 October 2000.Robert is exempt from the surcharge for the period 1 July 2001 to 31 August 2001, but will be subject to the surcharge from 1 September 2001.

Front-end deductible or excess

3.15 Under paragraph (ba) of Schedule 1 to the National Health Act 1953, a person may elect to receive reduced benefits under a modified applicable benefits arrangement. The front-end deductible or excess of the policy is equal to the reduction in benefits payable under the policy as a result of making the election.

3.16 A high front-end deductible or excess arises where the reduction in benefits payable under the policy exceeds $500 for a single contributor or $1,000 for all other contributors.

3.17 The new annual limit on front-end deductible products applies whether or not the excess is payable in one or more stages through the year and whether or not the registered health benefits organisation can reduce or waive all or part of the excess.

Example 3.2 Robyn, who is the only person covered by her policy, goes to hospital in August 2000, November 2000 and March 2001. Her policy requires her to pay the first $400 of expenses for each episode of treatment. As Robyn actually pays $1,200 in excess during the year she is not exempt from the surcharge as the excess for the year of income is greater than $500.Kevin, who is the only person covered by his policy, has an annual policy with a per calendar year front-end deductible of $400. During the period 1 January 2001 to 30 June 2002, Kevin goes to hospital in September 2001 and again in March 2002. Although Kevin has paid $800 excess in the 2001-2002 year of income, he is exempt from the surcharge as his annual excess is limited to $400.

Co-payment not a front-end deductible

3.18 A co-payment, which is an out of pocket expense dependent on the cost of hospital treatment, is not a front-end deductible. A co-payment arises due to the difference between the amount the health fund is prepared to pay, as specified in the applicable benefits arrangement and the cost of treatment determined by the hospital.

Example 3.3 Alan, who is the only person covered by his policy, goes to hospital and has an applicable benefits arrangement with a $400 per annum front-end deductible. The hospital charges $15,000 for the treatment and the health fund is willing to pay $14,500. Although Alan actually has $900 out of pocket expenses he would not be levied the surcharge because the front-end deductible or excess is below $500.

Medicare Levy Act 1986

3.19 Similar amendments to those made to the ANTS (MLS - FBT) Act are also made to the MLA 1986.

Applicable benefits arrangement

3.20 Items 4 and 5 amend the existing interpretation of an applicable benefits arrangement in the MLA 1986 by inserting a new qualifying condition. This new qualifying condition will place a cap on the amount that a private patient hospital cover policy can have as a front-end deductible or excess. [Schedule 3, item 4, subsection 3(5A), item 5, subsection 3(7)]

3.21 For a single contributor, the front-end deductible or excess will be capped at an annual amount of $500. For all other contributors, the front-end deductible or excess will be capped at an annual amount of $1,000. Where the front-end deductible or excess exceeds these amounts, it will be a 'high front-end deductible or excess' and the policy will not be a policy that provides private patient hospital cover. [Schedule 3, item 4, paragraph 3(5A)(b), item 5, paragraph 3(7)(b]

3.22 A contributor to a policy of this type will only be liable to the surcharge from 1 July 2000 if the policy was taken out after 24 May 2000. [Schedule 3, item 4, subsection 3(5B)]

3.23 A contributor to a policy with a front-end deductible or excess which is higher than the new front-end deductible limit who took out the policy on or before 24 May 2000, will remain exempt from the surcharge until such time that they cease to maintain continuous membership of the policy.

3.24 For example, a contributor who is approved by a health fund to suspend his/her policy will remain exempt from the surcharge, as suspension does not cease continuous membership.

3.25 However, a contributor who ceases to contribute to the same high front-end deductible policy after 24 May 2000, only to recommence contributions to a high front-end deductible policy at a later date, will be subject to the surcharge from 1 July 2000 or the date they ceased continuous membership of the original front-end deductible policy whichever is the latter.

Application and transitional provisions

3.26 The amendments are to apply from 1 July 2000. [Schedule 3, item 6]

3.27 Contributors who hold a high front-end deductible policy which commenced on or before 24 May 2000 will remain exempt from the surcharge, while ever they maintain continuous membership of the policy.

Regulation impact statement

Policy objective

3.28 This measure aims:

to ensure that an appropriate level of private patient hospital cover is held by high income earners in order to exempt them from the Medicare levy surcharge; and
to give high income earners the incentive to use the private health system when hospital treatment is required.

Background

3.29 The introduction of the surcharge from 1 July 1997 aimed to encourage high income earners to take out private patient hospital cover rather than rely on the public health care system, especially for elective procedures.

3.30 The surcharge is currently implemented through sections 8B, 8C and 8D of the MLA 1986 and sections 12, 13 and 14 of ANTS (MLS - FBT) Act. The Medicare levy is increased by 1% if private patient hospital cover is not held and the sum of taxable income and reportable fringe benefits exceed $50,000 for single contributors and $100,000 for all other family types. The threshold level of $100,000 is adjusted for dependent children. For the purpose of the above legislation and this amendment people with taxable income in excess of these limits are referred to as high income groups.

3.31 Private patient hospital cover is defined as an applicable benefits arrangement within the meaning of section 5A of the National Health Act 1953, to which paragraph 5A(1A) of that Act applies.

3.32 A problem with this current legislation has arisen because some health funds have developed applicable benefits arrangements (hospital cover) with high front-end deductibles (also known as excesses) which are much cheaper to purchase than the minimum potential surcharge applicable.

3.33 Front-end deductible products are permitted under paragraph (ba) of Schedule 1 of the National Health Act 1953 and under a Ministerial Direction issued pursuant to paragraph 73BE(1) (b) and subsection 73BE(5) of the National Health Act 1953. The level of allowable excess is currentlycapped at $1,000 per annum for single contributors and $2,000 per annum for all other membership categories. It has been claimed that some front-end deductible products within these limits are so inexpensive and tokenistic they are designed specifically to appeal to high income earners who seek only to avoid the surcharge with no intention of using the private health care system.

Implementation options

3.34 The simplest option for implementing this decision would be to amend the Ministerial Direction from the present caps of $1,000/$2,000 to the new caps of $500/$1,000. However, this option would affect all persons wishing to utilise front-end deductible policies whereas the intent is to target only high income earners who might use the policies to avoid the surcharge.

3.35 Therefore, the only implementation option which achieves the policy objective while still allowing registered health benefits organisations to offer high front-end deductible products is to add a further condition to the definition of 'private patient hospital cover' that must be held by high income earners to be exempt from the surcharge. This will require an amendment to the meaning of an applicable benefits arrangement for the purposes of both the MLA 1986 and the ANTS (MLS - FBT) Act.

3.36 The amendment will mean that an applicable benefits arrangement will only occur where the front-end deductible or excess of that arrangement is less than or equal to $500 for a single contributor, or less than or equal to $1,000 for other contributors. These caps are annual amounts and can apply in respect of single or multiple payments, and single and multiple members where appropriate. This additional condition for exemption from the surcharge will apply from 1 July 2000. Policies with front-end deductibles higher than these amounts are known as 'high front-end deductibles'.

Transitional arrangements

3.37 High income earners who take out a high front-end deductible policy on or before 24 May 2000 will be exempt from the surcharge while ever they maintain continuous membership to the same table.

3.38 These transitional arrangements recognise high income earners who have purchased hospital insurance prior to this new measure taking effect, did so in good faith based on the information available to them at the time.

Assessment of impacts of the implementation option

Impact group identification

3.39 The proposed new measure will affect the following groups:

high income groups and their tax advisers;
registered health benefits organisations;
public and private hospitals;
the Commonwealth Government; and
the Australian Taxation Office (ATO).

Analysis of costs

High income groups

3.40 The compliance cost to high income groups and their tax advisers will be minimal and will be limited to the time costs associated with learning about the new limit on front-end deductible hospital cover eligible for exemption from the surcharge.

Registered health benefits organisations

3.41 All new members that purchase a high front-end deductible after 24 May 2000 will need to be advised by health funds of the new arrangements at the time of purchase. Those eligible for grandfathering under the transitional arrangements should also be advised at this time.

3.42 No later than the beginning of the 2001 tax year, registered health benefits organisations (health funds) will need to advise all members of applicable benefits arrangements of the new limit on front-end deductibles eligible for exemption from the surcharge.

3.43 For the purpose of preparing tax returns, health funds already provide members with a Private Health Insurance Statement. For the year of income ending 30 June 2001 this statement will need to provide additional information on the level of front-end deductible policy held and the number of days covered by the policy. Where a contributor had been a member of more than one applicable benefits arrangement during the tax year, the front-end deductible details of each table will need to be specified, together with the period of membership.

3.44 The compliance cost to health funds will be moderate. No change is required to health fund product design and no restrictions imposed on product availability. However, health funds will face information dissemination costs to ensure all existing and new members are aware of the new arrangements including:

mailout to all existing health fund members;
fact sheets distributed through health fund offices targeted to new members who join after 24 May 2000;
revised health fund brochures and publicity material including update to web sites; and
update to Private Health Insurance Statement to include information on the level of front-end deductible product held by each member.

3.45 Other than those administrative costs, the impact on health funds is likely to be small - principally on those few funds that in the past have attracted new high income customers with high front-end deductible policies and will, in future, be less able to do so.

Administrative Costs - ATO

3.46 The ATO will not incur any additional costs beyond those already allocated to processing returns.

3.47 The amount of new material needed to explain the change, including additional information through TaxPack, will be very small.

Benefits

Public and private hospitals

3.48 This new measure will provide incentives for high income earners to take out comprehensive private hospital cover and use the private health system when hospital treatment is required. The public hospital system will benefit as some pressure on resources is transferred to the private health system. Private hospitals will benefit through increased demand for their services.

The Commonwealth Government

3.49 The Commonwealth Government will benefit from the enhanced integrity of the taxation system.

Government revenue

3.50 To the extent that high income earners do not meet the new requirements for exemption from the Medicare levy surcharge from 1 July 2000, taxation revenue will increase.

3.51 This will, however, be offset by a potential increase in Government outlays through the 30% Rebate on private health insurance premiums as high income earners transfer from low premium products to more comprehensive hospital cover with higher premiums.

3.52 The net impact on Government revenue cannot be quantified as it is not possible to predict the proportion of high income groups that will fail to meet the new requirements and incur the surcharge. For those high income groups that do upgrade their cover, it is not possible to predict which level of cover high income groups will move to, or health fund pricing behaviour.

Consultation

3.53 Health funds have also been advised of this broad detail at various meetings between the Department of Health and Aged Care and health funds. Details on transitional arrangements have not been discussed due to the need to manage the public notification of this issue.

Index

Schedule 1: CDEP Scheme Participant Supplement
Bill reference Paragraph no.
Items 1 and 2, subsection 160AAA(1) 1.8
Item 3, paragraph 202CB(6)(a) 1.13
Item 4, paragraph 202CE(7)(a) 1.13
Item 5, subsection 221A(1) 1.11
Item 6, subsection 16(1) 1.9
Item 7, paragraph 12-110(1)(d) 1.12
Item 8 1.14

Schedule 2: Exempting value received from GST Direct Assistance Certificates
Bill reference Paragraph no.
Item 1 2.15
Item 2 2.12
Item 3 2.16

Schedule 3: Medicare levy and surcharge for health insurance policy with high excess
Bill reference Paragraph no.
Item 2 3.8
Item 3, subsections 4(2) and 4(5) 3.9
Item 3, paragraphs 4(2)(b) and 4(5)(b) 3.10
Item 3, paragraph 4(3) 3.11
Item 4, subsection 3(5A) 3.20
Item 4, subsection 3(5B) 3.22
Item 4, paragraph 3(5A)(b) 3.21
Item 5, subsection 3(7) 3.20
Item 5, paragraph 3(7)(b) 3.21
Item 6 3.26


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