House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Taxation Laws Amendment (Changes for Senior Australians) Bill 2001

This Bill amends the Income Tax Assessment Act 1936 to enable the rebates available for low income aged persons and certain pensioners to be increased by regulation.

The amendments give effect to the Governments announcement in the 2001-2002 Federal Budget to increase the low income aged persons rebate and the pensioner rebate for Australians of age pension age (senior Australians). This measure will enable the following classes of senior Australians to earn up to the following amounts of income without having any liability to income tax:

This Bill also amends the Medicare Levy Act 1986 to ensure that these senior Australians, who will not be subject to income tax up to these levels, will also not be subject to the Medicare levy liability on that income.

This Bill also increases the Medicare levy low income threshold for pensioners who are under the age pension age to ensure that they also do not have a Medicare levy liability when they have no income tax liability. When combined with the recent increases in the maximum pensioner rebate, this means that pensioners under age pension age can earn income without paying income tax or incurring a Medicare levy liability.

Aligning the Medicare levy low income thresholds with the increased tax-free thresholds, for senior Australians and pensioners under the age pension age, will ensure that where those persons do not have a tax liability due to the operation of the rebates, they will not be required to pay any Medicare levy either.

Finally, this Bill amends the Income Tax Assessment Act 1997 to ensure payments made by the Commonwealth and known as the one-off payment to the aged are exempt from income tax.

Date of effect: The amendments will apply to assessments for the 2000-2001 and later years of income.

Proposal announced: The changes were announced as part of the Governments 2001-2002 Federal Budget.

Financial impact: The cost to revenue is expected to be as follows:

Compliance cost impact: While annual changes to the rebates and Medicare levy thresholds are customary, there will be some costs in individuals and their advisers acquainting themselves with the measures announced in the 2001-2002 Federal Budget. There will also be cost in updating computer systems to cater for the new arrangements. It has not been possible to quantify these costs. To the extent that some individuals will now no longer need to lodge a tax return compliance costs will fall.

Summary of benefits

Levels of tax-free income

Note:

For senior Australians the Medicare levy does not become payable until taxable income exceeds $20,000.

For recipients of Commonwealth government payments, who are below age pension age, the Medicare levy does not become payable until taxable income exceeds $15,970.

For all other Australians the Medicare levy does not become payable until taxable income exceeds $13,807.

Chapter 1 - Low income rebates

Outline of chapter

1.1 Schedule 1 to this Bill will amend the Income Tax Assessment Act 1936 (ITAA 1936) to identify which persons qualify for a rebate under section 160AAAA and which persons qualify for a rebate under section 160AAA.

Context of reform

1.2 The amendments will enable regulations to be made to ensure that senior Australians and certain pensioners do not pay income tax or the Medicare levy until their taxable incomes exceed the higher new nil income tax liability thresholds.

Summary of new law

1.3 The rebates for low income aged persons, and those persons who are defined as being of age pension age in either the Social Security Act 1991 or the Veterans Entitlements Act 1986 and are receiving a pension under either of those Acts (senior Australians), will be available under section 160AAAA of the ITAA 1936.

1.4 Similarly, where a beneficiary of a trust is of age pension age and receiving an age pension, the rebate will be available to trustees in the trustees assessment under section 160AAAB of the ITAA 1936.

1.5 The rebates for those persons who are under age pension age and recipients of other Australian government payments which are defined as rebatable pensions will be available under section 160AAA.

1.6 The calculation of the rebate for those senior Australians who are eligible for a low income aged persons rebate under section 160AAAA of the ITAA 1936 are outlined in Regulation 150AD. Eligibility for the rebate will be contained in Regulation 150AB.

1.7 The calculation of the rebate for those persons who are under age pension age and eligible for a pensioner rebate under section 160AAA of the ITAA 1936 are outlined in Regulation 151.

1.8 The proposed nil income tax liability thresholds for the 2000-2001 year of income and subsequent years are outlined in Table 1.1.

Comparison of key features of new law and current law

Detailed explanation of new law

1.9 This Bill replaces the existing subsection 160AAAA(2) to state that to qualify for a tax rebate, persons who are defined as pension age under the Veterans Entitlements Act 1986 and receive a pension under that Act, will now be eligible for the rebate under section 160AAAA. [Schedule 1, item 1, subsection 160AAAA(3)]

1.10 This Bill provides that the levels of taxable income where a person qualifies for a rebate under subsection 160AAAA(2) will be specified in the regulations [Schedule 1, item 2] . The amendments mean that age pension age recipients of pensions under either the Social Security Act 1991 or the Veterans Entitlements Act 1986 will now be eligible for a rebate under section 160AAAA rather than section 160AAA. This amendment will mean that all low income aged persons, whether they be pensioners or self-funded retirees, will be covered by the one rebate.

1.11 The reference in subsection 160AAAA(4) to subsection 160AAAA(3) instead of paragraph 160AAAA(3)(a) is merely a technical amendment. As a result of the amendment to subsection160AAAA(3), paragraph 160AAA3(a) has now been repealed. [Schedule 1, item 3]

1.12 Subsection 160AAAB(2) is amended to insert a new condition to ensure that where a beneficiary is in receipt of a pension, allowance or benefit under the Veterans Entitlements Act 1986 (other than Part VII), and has reached pension age within the meaning of that Act, the trustee will be entitled to the rebate. A trustee will qualify for rebate under section 160AAAB in the trustees assessment in respect of the beneficiarys share of the net income of the trust. This ensures that trustees in respect of beneficiaries who are in receipt of a service pension, and are of age pension age, are entitled to the same rebate as trustees of a beneficiary who is a low income aged person or is a person who is a pension age recipient of a pension under the Social Security Act 1991. [Schedule 1, item 4]

1.13 The amendments also provide that the levels of taxable income where a trustee qualifies for a rebate under section 160AAAB will be specified in the regulations. [Schedule 1, item 5]

1.14 The reference to paragraph 160AAAB(3)(a) in subsections 160AAAB(4) and (5) is deleted because the paragraph has been repealed. [Schedule 1, items 6 and 7]

1.15 This Bill also inserts a new subsection 160AAA(4A) to state that where taxpayers are entitled to a rebate under both sections 160AAA and 160AAAA, the taxpayer will be entitled to a higher rebate under section 160AAAA. The same applies for a beneficiary of a trust where the trustee is entitled to a rebate under both sections 160AAAA and 160AAAB in respect of the taxpayer. [Schedule 1, item 10]

1.16 As a result of new subsection 160AAA(4A), the references in subsections 160AAA(2) to (4) are amended to include the reference to subsection 160AAA(4A). These are minor technical amendments. [Schedule 1, items 8 and 9]

1.17 The Government will amend the regulations so that the taxpayers rebate amount is increased by $1,037 for single aged pensioners and low income aged persons who are treated as single. For aged pensioners receiving an illness-separated-rate pension and low income aged persons treated as separated due to illness, the rebate amount is increased by $751. For aged pensioners receiving a partnered-rate pension and low income aged persons treated as partnered couples, the regulations are being amended to increase the taxpayers rebate amount by $900. The different rebate amounts for the partnered-rate pension and the illness-separated-rate pension is due to differing pension levels.

1.18 The amendments to the regulations will mean that pensioners of age pension age and self-funded retirees will now be able to earn significantly more income before paying income tax as a result of the increased rebates. In particular, single, partnered and illness-separated aged pensioners and low income aged persons will have a nil income tax liability threshold of $20,000, $16,306 and $18,882 respectively. Table 1.1 sets out the current and the proposed nil income tax liability thresholds.

1.19 The rebates will phase out at the following levels:

•

single - $37,840;

•

illness-separated couples - $35,202; and

•

married - $29,122.

After these amounts no rebate will be available.

1.20 The Government will amend the income tax regulations as soon as practicable following this Bill receiving Royal Assent.

Note:

(A)

Figures do not incorporate the low income rebate.

(B)

Figures incorporate the low income rebate.

Application and transitional provisions

1.21 The amendment specifies that the amendments made by this Schedule, will apply to the 2000-2001 year of income and all later years of income. [Schedule 1, item 11]

1.22 This amendment provides that regulations previously made under subsections 160AAAA(3) and 160AAAB(3), which are in force before these amendments, are taken to have been made under those sections as amended by this Bill. [Schedule 1, item 12]

Chapter 2 - Medicare levy thresholds

Outline of chapter

2.1 Schedule 2 to this Bill amends the Medicare Levy Act 1986 (MLA 1986) to raise the Medicare levy low income thresholds for senior Australians and certain pensioners who receive the Commonwealth pension and are under the age pension age. This measure ensures that the Medicare levy low income thresholds are aligned with the higher income tax-free thresholds announced by the Government in the 2001-2002 Federal Budget. The effect of this measure is that it allows senior Australians and certain pensioners to be free from both income tax and the Medicare levy.

Summary of new law

2.2 This amendment raises the Medicare levy low income threshold for senior Australians to $20,000. This will enable senior Australians (which include pension age Commonwealth pension recipients and self-funded retirees) to earn up to $20,000 before they begin to incur a Medicare levy liability.

2.3 This amendment also raises the Medicare levy low income threshold for certain other pensioners (who receive Commonwealth pensions and are under the age pension age) to $15,970. This will enable these pensioners to earn up to $15,970 before they begin to incur a Medicare levy liability.

2.4 The phase-in limit (above which people start to pay the Medicare levy at the full rate) has also been raised for senior Australians and certain pensioners to correspond with the proposed higher Medicare levy low income thresholds. This ensures that people who enjoy the higher Medicare levy low income thresholds are phased into the Medicare levy regime, at a reduced rate, when their income level goes above the threshold. This proposal is consistent with the phase-in rule for all other Australians who ease into the Medicare levy regime.

Comparison of key features of new law and current law

Detailed explanation of new law

2.5 This Bill introduces 2 new definitions into subsection 3(1) of the MLA 1986. The first definition of a phase-in limit sets a higher upper limit for senior Australians and certain pensioners before the Medicare levy is applied at the full rate. This amendment complements the proposed higher Medicare levy low income thresholds for these people (refer to paragraph 2.6). It also ensures that the reduced rate of the Medicare levy is applicable to senior Australians and certain pensioners when they enter the Medicare levy regime. [Schedule 2, item 1]

2.6 The phase-in limit sets the limit above which the Medicare levy is payable at the full rate:

•

for a person entitled to a low income aged persons rebate or a pension rebate, where the person has reached age pension age (senior Australians) - $21,621;

•

for a person entitled to a pension rebate (below age pension age) - $17,264; or

•

for all other people - $14,926.

2.7 The second definition of a threshold amount sets a higher Medicare levy low income threshold for senior Australians and certain pensioners to ensure they can earn a higher level of income before they are liable for any Medicare levy. The higher thresholds allow senior Australians to earn up to and including $20,000 before they are liable for any Medicare levy. It also means that Commonwealth pension recipients under the age pension age can earn up to and including $15,970 before they are liable for any Medicare levy. All other Australians will continue to enjoy the current Medicare levy low income threshold of $13,807. [Schedule 2, item 2]

2.8 The threshold amount sets the limit above which the Medicare levy first becomes payable at the reduced rate:

•

for a person entitled to a low income aged persons rebate or a pension rebate, where the person has reached age pension age (senior Australians) - $20,000;

•

for a person entitled to a pension rebate (below age pension age) - $15,970; or

•

all other people - $13,807.

2.9 This Bill makes minor technical amendments to support the change from a single Medicare levy low income threshold (of $13,807 for all Australians) to higher threshold rates for senior Australians and certain pensioners by replacing the amount of $13,807 with the term threshold amount. [Schedule 2, items 3 and 4]

2.10 This Bill makes another technical amendment to support the higher phase-in limits (where the Medicare levy is applied at the full rate) applicable to senior Australians and certain pensioners by replacing the amount of $14,926 with the term phase-in limit. [Schedule 2, item 5]

2.11 This Bill also amends the definition of family income threshold for a person who is entitled to a rebate under section 160AAAA (a person of age pension age) to mean $31,729, increased by $2,140 for each dependent. This ensures that a person will not be liable to any Medicare levy where their family income is below $31,729 even though their individual income may exceed $20,000. [Schedule 2, item 6]

2.12 This Bill amends section 10 of the MLA 1986 to ensure that where a beneficiary would have been entitled to a low income aged persons rebate or a pension rebate, that benefit will be available to the trustee. In other words, this amendment allows senior Australians to earn a higher level of income before they are liable for any Medicare levy. [Schedule 2, item 7]

Application and transitional provisions

2.13 This amendment applies to assessments for the 2000-2001 income year and later income years. [Schedule 2, item 8]

Chapter 3 - Exemption of certain payments

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt, from income tax, a one-off payment (known as the one-off payment to the aged) which will be made to all senior Australians as announced in the Governments 2001-2002 Federal Budget. [Schedule 3, item 1]

3.2 This one-off payment to the aged is to be made through Centrelink. The amount is to be $300.

3.3 This Bill amends subsection 52-10(2) of the ITAA 1997 to ensure that these one-off payments to the aged are exempt from tax.

Application and transitional provisions

3.4 The amendment will apply to assessments for the 2000-2001 year of income and later years of income. [Schedule 3, item 2]