House of Representatives

Private Health Insurance Incentives Amendment Bill 1998

Private Health Insurance Incentives Amendment Act 1998

Private Health Insurance Incentives Bill 1998

Private Health Insurance Incentives Act 1998

Taxation Laws Amendment (Private Health Insurance) Bill 1998

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP and the Minister for Health and Aged Care, the Hon Dr Michael Wooldridge, MP))

General outline and financial impact

The Private Health Insurance Incentives Bill 1998 will provide for a financial incentive for people who take out or maintain private health insurance. The incentive is in the form of a direct payment or premiums reduction and is equal to 30% of the cost of private health insurance cover. The measure is complemented by amendments made to the ITAA 1997 by the Taxation Laws Amendment (Private Health Insurance) Bill 1998 which provides the incentive in the form of a tax offset (also known as a rebate).

The Private Health Insurance Incentives Amendment Bill 1998 closes off the current private health insurance incentive scheme (PHIIS).

Date of effect: 1 January 1999.

Proposal announced: 13 August 1998 as part of the Government's tax reform policy document, Tax Reform: not a new tax, a new tax system.

Financial and compliance cost impact: See Regulation Impact Statement.

Summary of Regulation Impact Statement

Impact: Low

Main points:

·
The measure will mainly impact on existing members of private health funds and persons who take up membership because of the reduced cost of private health insurance.
·
Compliance costs for individuals participating in the scheme will generally be the same as under PHIIS.
·
Administrative costs will increase slightly from those incurred under PHIIS. This is because of the inclusion of the direct payment option and the broader range of persons to whom the new scheme will apply.

Policy objective: To increase the proportion of the population covered by private health insurance.

Chapter 1 - Purpose and date of effect

Purpose of amendments

1.1 The PHII Bill will provide a non income-tested financial incentive for individuals and families to take out or maintain private health insurance cover. It is provided by way of a 30% reimbursement of premiums paid, or a 30% premium reduction. The incentive is generally available to an individual who pays for appropriate private health insurance cover with a fund registered under Part VI of the National Health Act 1953.

1.2 The measure is complemented by amendments made to the ITAA 1997 by the TLA(PHI) Bill which provides the incentive in the form of a tax offset.

1.3 The amendments contained in the PHIIA Bill will amend the PHIIA 1997 as a consequence of the introduction of the new scheme. The amendments provide for the cessation of the PHIIS on 31 December 1998, to coincide with the operation of the new scheme.

Date of effect

1.4 The incentive and offset available under the PHII and TLA(PHI) Bills will apply from 1 January 1999, affecting the 1998-99 and later financial years. Amendments made by the PHIIA Bill will close off the current scheme at 31 December 1998.

Chapter 2 - Background to legislation

2.1 In the 1996-97 Budget, the Government announced details of a private health insurance incentive scheme (known as PHIIS). The scheme has operated from 1 July 1997 and provides benefits to certain persons who take out private health insurance. The benefit is provided by way of reduced premiums, or a tax offset which can be claimed in an income tax assessment.

2.2 The relevant legislation which provides for reduced premiums is the PHIIA 1997. The tax offset was provided for by amendments to the ITAA 1997.

2.3 The scheme is income tested and is available to a single individual with taxable income up to $35,000 and to a couple or a family with a combined taxable income up to $70,000. The threshold for families is increased by $3,000 for each dependent child after the first.

2.4 The benefit is only available if a minimum premium is paid. The minimum premium depends upon the type of cover provided by the policy and how many persons are covered. There is also a maximum benefit payable under PHIIS which depends on the number and kind of persons covered by the policy and whether the policy provides hospital cover, ancillary cover or combined cover.

2.5 The Government, as part of its tax reform package, announced in Tax Reform: not a new tax, a new tax system, a new form of assistance for families and individuals with private health insurance which provides for either an effective reimbursement or a discount of 30% of the cost of private health insurance cover. The new scheme which will replace PHIIS from 1 January 1999 is not income tested and there is a choice of taking the incentive in the form of a direct payment, reduced premium, or tax offset. Under the new tax system proposed in the Government's tax reform plan, this is as generous, or even more generous, than full deductibility for health insurance premiums for more than 80% of taxpayers.

2.6 The incentive provided for by the PHII Bill is complemented by amendments made to the ITAA 1997 by the TLA(PHI) Bill which provides the incentive in the form of a tax offset.

2.7 Under the new scheme, to the extent that the benefit has been obtained as a premium reduction, a claim cannot be made for either a direct payment or a tax offset. Similarly, if the benefit has been obtained as a direct payment or a tax offset, a claim cannot be made for either of the other forms of obtaining the benefit.

Chapter 3 - The incentive payments scheme

Explanation of the amendments

3.1 Chapter 2 of the PHII Bill sets out how an individual who has paid, or whose employer has paid, as a fringe benefit, premiums for private health cover can claim the direct payment provided for under the scheme. It sets out which individuals are eligible to claim the payment, how the payment is calculated and how claims can be made. The Chapter also sets out notification requirements imposed on claimants and health funds.

Entitlement to payments and claims

3.2 Division 4 of Part 2 of the Bill sets out which individuals are entitled to receive payments under the scheme and how the payments are calculated.

Who is entitled to receive payments?

3.3 Under the scheme an individual is entitled to receive a payment if the individual has paid or the individual's employer has paid, as a fringe benefit, premiums for an appropriate private health insurance policy for the 1998-1999 financial year or a later financial year. [New subsection 4-5(1)]

3.4 The term fringe benefit is defined by reference to the FBTAA 1986 to include benefits provided not only to an employee but also to associates of an employee. Premiums paid by an employer can thus be paid in respect of a policy which provides private health cover not only for an employee but also an associate of an employee. (Associate is defined to include relatives of an employee.)

Example 1: Joe, a baker, pays premiums to a private health insurance fund for health cover for his employees and their families. Under the FBTAA 1986, the premium payments are a fringe benefit. Each of Joe's employees are entitled to the direct payment in respect of premiums paid on his or her behalf provided the premium payments are made in respect of an appropriate private health insurance policy.

3.5 However, new subsection 4-5(2) provides that an incentive payment is not available to the extent that a premium reduction has already been obtained in respect of a premium.

Meaning of appropriate private health insurance policy

3.6 An individual is only entitled to a direct payment for premiums paid in respect of an appropriate private health insurance policy. This is defined in new section 20-5 as a private health insurance policy which meets the following criteria:

·
the policy provides hospital cover, ancillary cover or combined cover (see descriptions of these terms in the table below); and
·
each of the persons covered by the policy is a person who is eligible to claim benefits under Medicare.

3.7 The term private health insurance policy is defined in new section 20-5 as a contract of insurance entered into by a health fund in the course of carrying on a health insurance business within the meaning of section 67 of the National Health Act 1953. A health fund is defined in new section 20-5 to mean a registered organisation within the meaning of Part VI of the National Health Act 1953.

3.8 The terms hospital cover, ancillary cover and combined cover are defined in new section 20-5 as follows:

Type Description
hospital cover A policy provides hospital cover if it is an applicable benefits arrangement within the meaning of section 5A of the National Health Act 1953.
ancillary cover A policy provides ancillary cover if the persons it covers are wholly or partly covered for liability to pay fees and charges in respect of ancillary health benefits within the meaning of section 67 of the National Health Act 1953.
combined cover A policy which provides both hospital and ancillary cover.

Example 2: Joyce, a resident of New Zealand, pays premiums to a health fund in Australia for a private health insurance policy which provides health cover to her son Paul and his family who reside in Australia. Paul and his family are eligible to claim benefits under Medicare. Joyce is entitled to claim the direct payment as she is making payments in respect of premiums paid in respect of an appropriate private health insurance policy.

Calculation of the amount payable

3.9 An individual's entitlement to the direct payment for an amount paid under a policy depends on whether or not a person is registered or entitled to be registered under the PHIIA 1997 in respect of the policy before 1 January 1999. A person would be taken to be entitled to be registered before 1 January 1999 if he or she satisfied the eligibility criteria and started to pay premiums before that date. The entitlements are calculated so that the benefit available under the new scheme is no less than that which would have been available under PHIIS had a person been registered or entitled to be registered (see paragraph 4.37) in respect of a policy under that scheme in the 1998-99 financial year.

Premiums paid under a policy for the 1998-99 financial year

3.10 An individual's entitlement to a direct payment for premiums paid in respect of a policy for the 1998-99 financial year is determined as follows:

·
if no person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, the individual's entitlement is 30% of the premiums paid;
·
if a person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, an individual's entitlement is the greater of:

-
30% of the premium paid, or if, under PHIIS, the premium was reduced by an incentive amount, 30% of the premium that would have been payable if it had not been reduced; and
-
the incentive amount for the policy for the financial year (see paragraph 3.16). [New subsections 4-10(1), (2) and (3)]

Example 3: John paid a premium of $901.85 on 1 December 1998 in respect of a family policy to provide cover for the 6 month period 1 January 1999 to 30 June 1999. John had registered under PHIIS to claim a premium reduction, so the premium was reduced from $1,125. The reduction under PHIIS was calculated as the annual incentive amount ($450) pro-rated for half the financial year $450 * 181/365 ($223.15). Under the new scheme, John is notionally entitled to a direct payment which is the greater of:

(i)
30% of $1,125 ($337.50); and
(ii)
the incentive amount of $223.15;

therefore, he is entitled to $337.50.However, note that under new section 4-10 John's entitlement to the direct payment will be reduced by $223.15, ie. the amount that has already been received under PHIIS.

Example 4: Stephanie took out a single policy for hospital cover as from 1 July 1998. The premiums payable under the policy are $260 per annum or $10 per fortnight. In the financial year 1998-99, Stephanie was registered under PHIIS to claim a reduction in premiums. If PHIIS had continued from 1 January 1999 she would have been entitled to a reduction of $100 (ie. the annual incentive amount for a single policy providing hospital cover is $100) for the 1998-99 financial year. However, Stephanie would have received only $50.41 through fortnightly premium reductions up to 31 December 1998 when the PHIIS closed, assuming her last fortnightly payment was for cover up to 31 December 1998. Under the new scheme Stephanie is entitled to a payment of the greater of:

(i)
30% of $260 * 181/365 ($38.68); and
(ii)
the incentive amount of $100 * 181/365 ($49.59).

Under the new scheme, Stephanie is, therefore, entitled to payments of $49.59 for the period 1 January 1999 to 30 June 1999.

Premiums paid under a policy for a financial year after 1998-99

3.11 An individual's entitlement to a direct payment for premiums paid in respect of a policy for a financial year after the 1998-99 financial year is determined as follows:

·
if no person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, an individual's entitlement is 30% of the premiums they have paid;
·
if a person was registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year, an individual's entitlement is the greater of the following two amounts:

-
30% of the amount of the premium they have paid; and
-
the incentive amount for the policy for the financial year (see paragraph 3.16). [New subsections 4-10(4), (5) and (6)]

Example 5: On 1 May 1999, Greg renews a twelve month family policy for combined cover for himself and his dependent child. The premium paid is $1,400. Greg was registered under PHIIS to claim a premium reduction in the 1998-99 financial year. For the 1998-99 financial year Greg's entitlement to the payment is calculated as the greater of:

(i)
30% of $1,400 * 61/365 ($70.10); and
(ii)
61/365 * $450 ($75.21).

For the 1999-2000 financial year the payment is the greater of:

(i)
30% of $1,400 * 304/365 ($349.81); and
(ii)
304/365 * $450 ($374.79).

The total payment to which Greg is entitled is $75.21 + $374.79 ($450).

Example 6: Tom and Sylvia, who have a couple policy providing combined cover in the financial year 1999-2000, pay a premium of $100 per fortnight. Tom and Sylvia were ineligible to claim a benefit under PHIIS in 1998-99 because they did not satisfy the income test under that scheme in that year. Tom makes the premium payments out of his fortnightly salary. From 1 January 1999, Tom would be entitled to a direct payment of 30% of the premiums he pays, ie. $30 per fortnight.

Entitlement reduced where tax offset has been claimed

3.12 If an individual claims the incentive as a tax offset under new Subdivision 61-H of the ITAA 1997, the direct payment an individual is entitled to claim is reduced by the amount of the tax offset that has already been claimed. [New section 4-10(7)] This circumstance will only arise after an individual has lodged his or her tax return. The provision ensures than an individual cannot claim the benefit twice, ie. as a payment and a tax offset.

3.13 As discussed previously, under new subsection 4-5(2) a person cannot claim a direct payment in respect of a premium that has been reduced by the premium reduction scheme.

Entitlement where premiums relate wholly or partly to a period before 1 January 1999

3.14 New subsection 4-10(8) is a transitional measure that deals with premiums paid for an appropriate private health insurance policy that relates to a period before 1 January 1999. An individual who has paid the premium will not be entitled to a direct payment to the extent that the premium relates to a period before 1 January 1999. Where a premium relates to a period both before 1 January 1999 and after 31 December 1998, entitlement to the direct payment must be determined on a pro rata basis.

Example 7: On 1 May 1998 Ted's employer makes a premium payment of $1,400 for an appropriate private health insurance policy that provides private health insurance cover for Ted as a fringe benefit for the period 1 July 1998 to 30 June 1999. There is no entitlement to a premium reduction or tax offset under PHIIS. Ted is entitled to a direct payment under the scheme in relation to the period 1 January 1999 to 30 June 1999. The amount that can be claimed is 30% of $1,400 * 181/365 ($208.27).

Effect on entitlement where premium was reduced under PHIIS

3.15 New subsection 4-10(9) is a transitional measure that applies to premiums paid on or before 31 December 1998 for an appropriate private health insurance policy and the premium has been reduced under PHIIS. If the reduced premium relates to a period after 31 December 1998, the amount of the direct payment to which an individual would otherwise be entitled is reduced by the premium reduction that relates to the period after 31 December 1998.

Example 8: On 1 May 1998 Dennis pays a twelve month premium for a family policy covering Dennis and his dependent child. The premium is $2,400. Dennis is registered under PHIIS and his premium is reduced by the annual incentive amount of $450 to which he is entitled, ie. the premium is reduced to $1,950. Dennis is entitled to claim the direct payment under the new scheme for the period 1 January 1999 to 30 April 1999.The amount to which Dennis is notionally entitled is 30% of $2,400 * 120/365 ($236.71). This amount is reduced by 120/365 * $450 ($147.95), as this is the amount of the benefit that Dennis has already received by way of premium reduction under PHIIS. Dennis is entitled to a direct payment under the new scheme of $236.71 - $147.95 ($88.76).

Meaning of incentive amount

3.16 New section 20-10 provides a meaning for the term incentive amount. This is the same as the annual incentive amounts included in section 5-4 of the PHIIA 1997. The amount of the incentive depends on whether premiums are paid for the whole or part of the financial year:

·
if the premiums are paid for the whole of the financial year the incentive amount is as follows:

  Hospital only Ancillary only Hospital and ancillary
3 or more persons (family) $350 $100 $450
One dependent child and one other person (family) $350 $100 $450
Couple (neither a dependent child) $200 $50 $250
Individual $100 $25 $125

·
if the premiums are paid for part of a financial year, the incentive amount is calculated on a pro rata basis. The amount is calculated using the formula in new subsection 20-10(2) . The result of the formula is that the full year incentive amount applicable to the circumstances is apportioned according to the amount of the year (ie number of days) the premiums cover.

How to make a claim

3.17 An individual can only get a payment if he or she makes a claim for a payment. [New section 4-15] The rules for making a claim are set out in Division 6 of Part 3 .

Making a claim

3.18 An individual who is entitled to claim a direct payment under new section 4-5 must make a proper claim before he or she can be paid an amount. [New section 6-5] If more than one individual is paying premiums for the same policy, then each individual will need to make a separate claim for the payment.

What is a proper claim?

3.19 To be a proper claim the claim must:

·
be in a form approved by the HIC which may be an electronic form;
·
provide any information, together with such documents (if any), as required by the form;
·
be sent to or lodged at an office of the HIC or a place approved by the HIC; and
·
be lodged either in the financial year in which the premium is paid, or before the end of the next financial year. [New subsection 6-10(1)] This will allow a person to apply retrospectively for a direct payment benefit, provided the application is made within 12 months after the end of the income year in which the premium is paid.

3.20 The information that the HIC may require to be shown on the approved claim form could include:

·
the claimant's full name;
·
the claimant's address;
·
the claimant's Medicare number;
·
the annual premium payable under the policy;
·
the amount of premium being claimed;
·
names of individuals claiming in respect of the same premium; and
·
the frequency of the payments made in respect of the annual premium and the amounts of those payments.

3.21 The HIC must not approve a form under new paragraph 6-10(1)(b) that requires an individual to provide the tax file number of any individual. [New subsection 6-10(2)]

Withdrawal of claim

3.22 An individual making a claim may, at any time, withdraw a claim, by notifying the HIC in writing. The notification must be sent to or lodged at an office of the HIC or a place approved by the HIC. [New section 6-15]

Determination of claim and payment of amount

3.23 The HIC must grant or refuse a claim. [New subsection 6-20(1)] The HIC might refuse to pay a claim where, for example, the information provided by the individual does not match the information available to the HIC. Refusals to grant a claim are reviewable by the Administrative Appeals Tribunal.3.24 If the claim is granted, the HIC must pay the amount to the individual. [New subsection 6-20(2)] 3.25 If the HIC refuses the claim, it must issue a written notice to the claimant which sets out reasons for the refusal. [New subsection 6-20(3)]

Obtaining information under the scheme

3.26 Division 8 of Part 4 of the Bill sets out information requirements imposed on claimants and health funds in relation to the direct payment option.

Notification requirements for claimants

3.27 If an individual has lodged a claim in respect of a particular policy and a certain event happens so that the individual is no longer eligible to claim, or a change occurs in the amount or frequency of premium payments, the individual must advise the HIC within 30 days of the event or change. [New subsection 8-5(1)] 3.28 If the individual fails to notify the HIC as required, then the individual is guilty of an offence and may be liable to a maximum penalty of 60 penalty units. [New subsection 8-5(2)] 3.29 Section 4K of the Crimes Act 1914 does not apply to the obligation to provide information for the purpose of new subsection 8-5(1) .

Notification requirements for health funds

3.30 The HIC may, in writing, require a health fund to provide certain information relevant to the operation of the new measures about a person who:

·
is covered at any time during a financial year specified in the notice by an appropriate private health insurance policy issued by the fund; or
·
paid premiums under such a policy. [New subsection 8-10(1)]

3.31 The information that the HIC can require the fund to provide includes:

·
the name, residential address and date of birth of each individual covered by the policy, or the person who paid premiums under the policy;
·
the fund membership number of the policy;
·
the name, residential address and date of birth of the individual covered by the policy whom the health fund treats as the contributor in respect of the policy;
·
the name, residential address and date of birth of any individual who is a partner of a person covered by the policy;
·
whether the policy provides hospital cover, ancillary cover or combined cover;
·
the date on which the policy was issued;
·
whether the policy has terminated or been suspended, and if it has, the date on which it terminated or was suspended;
·
the amount of the premium payable under the policy;
·
the period to which the premium relates;
·
any increase or decrease in the premium payable under the policy; and
·
whether a payment in respect of a premium under the policy that was due within a period specified by the HIC was not paid. [New subsection 8-10(2)]

3.32 A health fund must provide the information in a form (including an electronic form) approved by the HIC within a period as shown on the notice issued by the HIC. [New subsection 8-10(3)]

3.33 The health fund is guilty of an offence if it fails to provide the information within the time as specified on the notice issued by the HIC. The maximum penalty for the offence is 20 penalty units. [New subsection 8-10(4)] The obligation to provide information is a continuing obligation and a health fund is guilty of an offence for each day, after the period specified in the notice, until the information is provided.

Chapter 4 - Premium reduction scheme

Explanation of the amendments

4.1 The premiums reduction scheme in Chapter 3 of the PHII Bill allows an individual who is covered by appropriate health insurance policy to register with his or her health fund in order to obtain a reduction in premiums that are payable under the policy.

Participation in the premiums reduction scheme

4.2 Part 5 of the PHII Bill sets out which individuals are eligible to register under the premiums reduction scheme, whether an individual is a participant in a particular financial year and the calculations used to determine the reduction in the premium. It also sets out matters relating to the registration process such as notification requirements imposed on applicants in relation to their registration, requirements imposed on health funds to notify the HIC in relation to applications made and requirements imposed on the HIC in relation to refusals or a revocation of a registration.

Who is eligible to claim a premium reduction?

4.2 An individual is eligible to participate in the premium reduction scheme for a financial year in respect of a private health insurance policy if:

·
the policy is an appropriate private health insurance policy - see paragraphs 4.3 to 4.5 below which describe this term;
·
the health fund that issued the policy is, for the year, a participating fund - see paragraphs 4.46 to 4.50 which describe the steps a fund must take to become a participating fund; and
·
the individual is eligible to apply to be registered in respect of a policy under the scheme - see paragraphs 4.9 to 4.10 below which describe which individuals are eligible to register in respect of a policy. [New section 10-5]

Meaning of appropriate private health insurance policy

4.3 This term is defined in new section 20-5 as a private health insurance policy which meets the following criteria:

·
the policy provides hospital cover, ancillary cover or combined cover (see descriptions of these terms in the table below); and
·
each of the persons covered by the policy is a person who is eligible to claim benefits under Medicare.

4.4 The term private health insurance policy is defined in new section 20-5 as a contract of insurance entered into by a health fund in the course of carrying on a health insurance business within the meaning of section 67 of the National Health Act 1953. A health fund is defined in new section 20-5 to mean a registered organisation within the meaning of Part VI of the National Health Act 1953.4.5 The terms hospital cover, ancillary cover and combined cover are defined in new section 20-5 as follows:

Type Description
hospital cover A policy provides hospital cover if it is an applicable benefits arrangement within the meaning of section 5A of the National Health Act 1953.
ancillary cover A policy provides ancillary cover if the persons it covers are wholly or partly covered for liability to pay fees and charges in respect of ancillary health benefits within the meaning of section 67 of the National Health Act 1953.
combined cover A policy which provides both hospital and ancillary cover.

How do individuals participate in the scheme?

Registration by HIC

4.6 Individuals who are eligible to register under the premiums reduction scheme for a financial year must apply to the health fund which issued the policy to be registered by the HIC in respect of the policy for that year. [New subsection 11-5(1)]

4.7 Once a health fund has received an application for registration it is required to notify the HIC of the application received. [New subsection 11-5(2)]

4.8 The HIC, on receiving a notice of an application from a health fund, must register the applicant in respect of the policy for the financial year if the HIC is satisfied that the individual is eligible to participate in the scheme. [New subsection 11-5(3)]

4.9 The HIC must notify a health fund when it registers an applicant in respect of an appropriate private health insurance policy issued by the health fund. [New subsection 11-5(4)]

Who is eligible to register?

4.10 Individuals who are eligible to apply for registration are individuals covered by the policy, other than dependent children. If every individual covered by the policy is a dependent child then a parent of any of the dependent children can apply for registration. [New subsection 11-10(1)]

4.11 An individual is not eligible to register for a financial year if another individual has already applied for registration in respect of a policy and the HIC has not refused to register that individual or that person's registration has not been revoked. [New subsection 11-10(2)]

Applications for registration

4.12 An application for registration under the scheme is required to be in a form approved by the Minister and must state the following details:

·
the name of the health fund to which the application is made;
·
the applicant's full name;
·
the applicant's date of birth;
·
the applicant's residential address;
·
the applicant's Medicare card number;
·
the fund membership number of the policy;
·
whether the policy covers only one individual or more than one individual;
·
the full name and date of birth of each individual covered by the policy (other than the applicant);
·
whether any of the above individuals covered are dependent children; and
·
any other information determined in writing by the Minister. [New subsection 11-15(1)]

4.13 In relation to the last dot point in paragraph 4.12, the Minister cannot determine that an individual provide the tax file number of any person. [New subsection 11-15(2)]

4.14 Determinations referred to in the last dot point in paragraph 4.12, are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901. [New subsection 11-15(3)]

4.15 An individual can make an application before or during the financial year concerned. [New subsection 11-15(4)] This means that, under the new scheme, an application for a premium reduction cannot be made after the end of the financial year in which a premium is paid.

Notifying the HIC

4.16 A health fund, on receiving an application for registration, must notify the HIC of the application within a period determined by the Managing Director. [New subsection 11-20(1)]

4.17 The notice must be in such a form, and contain such details, as the Managing Director determines in writing. [New subsection 11-20(2)]

4.18 For the purposes of new subsection 11-20(2) , the Managing Director of the HIC cannot determine that the participating fund provide the tax file number of any person, or any information about the physical, psychological or emotional health of any person. [New subsection 11-20(3)]

4.19 The Managing Director must also not seek information which relates to individuals other than the applicant or other persons covered by the policy. [New subsection 11-20(4)]

4.20 Determinations made by the Managing Director for the purpose of new subsection 11-20(2) are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901. [New subsection 11-20(5)]

Refusal to register

4.21 If the HIC refuses to register the applicant, it must provide notification in writing to the applicant. The notice must include the reasons for the refusal of the application. [New subsection 11-25(1)]

4.22 The applicant will be taken to be properly registered if the HIC does not notify the applicant of refusal within 14 days after the HIC has received the application from the health fund. [New subsection 11-25(2)]

4.23 A decision by the HIC to refuse to register an individual in respect of a policy is a decision reviewable by the Administrative Appeals Tribunal.

Notification requirements - registered persons

4.24 An individual who is registered in respect of a policy for a financial year must notify the health fund which issued the policy if a detail stated in the application changes and the detail concerns:

·
the number of individuals covered by the policy; or
·
the status of individuals as dependent children;

and the change is of such a kind that the incentive amount (see paragraph 4.44) applicable to a policy changes. [New subsection 11-30(1)]

4.25 An individual is guilty of an offence if a detail of the kind referred to in new subsection 11-30(1) changes and the individual fails to notify the health fund within 30 days. The maximum penalty is 60 penalty units. [New subsection 11-30(2)]

4.26 Section 4K of the Crimes Act 1914 does not apply to the obligation to provide information referred to in new subsection 11-30(2) . [New subsection 11-30(3)]

4.27 An individual who is registered in respect of a policy for a financial year may notify the health fund in writing if he or she no longer wishes to be registered in respect of the policy for the financial year. [New subsection 11-30(4)] It should be noted that because of new subsection 12-10(1) an individual will be taken to be registered in respect of the 1998-99 financial year under the premiums reduction scheme if the individual is registered under PHIIS for that year.

Notification requirements - health funds

4.28 If a health fund receives a notice of the kind referred to in new section 11-30 , the health fund must advise the HIC within a period determined by the Managing Director. [New section 11-35]

Revocation of registration

4.29 The HIC must revoke an individual's registration for a financial year if the HIC is satisfied that the individual is not eligible to participate in the premiums reduction scheme for that year. [New subsection 11-40(1)]

4.30 The revocation of a registration by the HIC does not affect an individual's right to make another application for registration. [New subsection 11-40(2)]

4.31 A decision by the HIC to revoke a registration is a decision reviewable by the Administrative Appeals Tribunal.

Variation of registration

4.32 A health fund is required to notify the HIC if the type of cover provided by a policy, ie. hospital, ancillary or combined in respect of which an individual is registered is varied. [New subsection 11-45(1)]

4.33 The HIC, onreceiving a such notice from a health fund, must vary the details of the registration accordingly. [New subsection 11-45(2)]

Retention of applications by health funds

4.34 A health fund must retain applications for a period of 5 years. The period for retention commences on the day the application was made. [New subsection 11-50(1)]

4.35 The health fund may retain the application in any form (including an electronic form) that has been approved by the Managing Director. [New subsection 11-50(2)]

4.36 The application received in such a form must be received in all courts and tribunals as evidence as if it were the original. [New subsection 11-50(3)]

How is the reduction in premiums calculated?

Reduction in premiums

4.37 The amount by which a premium will be reduced under the premiums reduction scheme depends on whether or not an individual is registered or entitled to be registered under PHIIS in respect of the policy for the 1998-99 financial year. A person would be taken to be entitled to be registered before 1 January 1998 if he or she satisfied the eligibility criteria and started to pay premiums before that date. The premium reduction is calculated so that the benefit available under the new scheme is no less than that which would have been available under PHIIS had a person been registered or entitled to be registered in respect of a policy under that scheme in the 1998-99 financial year.

4.38 New subsection 12-5(1) provides that, if an individual is a participant in the premiums reduction scheme in relation to an appropriate private health insurance policy for a financial year, the premium that is payable for the financial year is reduced in accordance with the rules set out in new section 12-5 .

Premiums paid under a policy for the 1998-99 financial year

4.39 The premium reduction for premiums payable in respect of a policy for the 1998-99 financial year is determined as follows:

·
if the policy was not subject to a premium reduction under PHIIS in respect of the 1998-99 financial year, the premium reduction is 30% of the premiums payable;
·
if the policy was subject to a premium reduction under PHIIS in respect of the 1998-99 financial year, the premium reduction is the greater of:

-
30% of the premium payable, or, if the premium was reduced by an incentive amount under PHIIS, 30% of the premium that would have been payable if it had not been so reduced; and
-
the incentive amount for the policy for the financial year. [New subsection 12-5(2)]

Example 1: Johnpaid a premium of $901.85 on 1 December 1998 in respect of a family policy to provide cover for the 6 month period 1 January 1999 to 30 June 1999. John had registered under PHIIS to claim a premium reduction, so the premium was reduced from $1,125. The reduction under PHIIS was calculated as the annual incentive amount ($450) pro-rated for half the financial year $450 * 181/365 ($223.15). John is a participant under the premiums reduction scheme in respect of the 1998-99 financial year (see new subsection 12-10(1) ). John is notionally entitled to a premium reduction which is the greater of:

(i)
30% of $1,125 ($337.50); and
(ii)
the incentive amount of $223.15.

So while John is notionally entitled to a premium reduction of $337.50 under new subsection 12-5(6) the premium reduction will be reduced by $223.15 as this amount by which the premium has already been reduced under PHIIS.

Example 2: Stephanie took out a single policy for hospital cover as from 1 July 1998. The premiums payable under the policy are $260 per annum or $10 per fortnight. In the financial year 1998-99, Stephanie was registered under PHIIS to claim a reduction in premiums. If PHIIS had continued from 1 January 1999 she would have been entitled to a reduction of $100 (ie the annual incentive amount for a single policy providing hospital cover is $100) for the 1998-99 financial year. However, Stephanie would have received only $50.41 through fortnightly premium reductions up to 31 December 1998 when the PHIIS closed, assuming her last fortnightly payment was for cover up to 31 December 1998. Stephanie is a participant under the premiums reduction scheme in respect of the 1998-99 financial year (see new subsection 12-10(1) ).Under the new scheme Stephanie is entitled to a premium reduction equal to the greater of:

(i)
30% of $260 * 181/365 ($38.68); and
(ii)
the incentive amount of $100 * 181/365 ($49.59).

Under the new scheme Stephanie is, therefore, entitled to a premium reduction of $49.59 for the period 1 January 1999 to 30 June 1999.

Premiums paid under a policy for a financial year after 1998-99

4.40 The premium reduction for premiums paid in respect of a policy for a financial year after the 1998-99 financial year is the greater of:

·
30% of the amount of the premium paid; and
·
the incentive amount for the policy for the financial year. [New subsection 12-5(3)]

Example 3: On 1 May 1999, Greg renews a twelve month family policy for combined cover for Greg and his dependent child. The premium paid is $1,400. Greg was registered under PHIIS to claim a premium reduction in the 1998-99 financial year. Greg is a participant in the premiums reduction scheme in respect of the 1998-99 financial year (see new subsection 12-10(1) ) and registers with his health fund to become a participant in the 1999-2000 financial year.For the 1998-99 financial year, Greg's premium reduction is calculated as the greater of:

(i)
30% of $1,400 * 61/365 ($70.10); and
(ii)
61/365 * $450 ($75.21).

For the 1999-2000 financial year the amount of the premium reduction is the greater of:

(i)
30% of $1,400 * 304/365 ($349.81); and
(ii)
304/365 * $450 ($374.79).

The total amount of premium reduction to which Greg is entitled is $75.21 + $374.79 ($450).

Example 4: Tom and Sylvia, who have a couple policy providing combined cover in the financial year 1999-2000, pay a premium of $100 per fortnight. Tom and Sylvia were ineligible to claim a benefit under PHIIS in 1998-99 because they did not satisfy the income test under that scheme in that year. Tom makes the premium payments out of his fortnightly salary. If Tom or Sylvia register with their health fund under the new scheme then from 1 January 1999, the premiums Tom has deducted from his salary will be reduced by $30.

No reduction allowable where an amount received as an incentive payment

4.41 An individual is not entitled to a reduction under the premiums reduction scheme in respect of a premium payable if an individual has received an incentive payment in respect of the premium. [New subsection 12-5(4)]

Entitlement where premiums relate wholly or partly to a period before 1 January 1999

4.42 New subsection 12-5(5) is a transitional measure that deals with premiums paid for an appropriate private health insurance policy that relates to a period before 1 January 1999. An individual who has paid the premium cannot claim a premium reduction to the extent that the premium relates to a period before 1 January 1999. Where a premium covers a period before 1 January 1999 and after 31 December 1998, the premium reduction must be determined on a pro rata basis.

Example 5: On 1 May 1998 Ted makes a premium payment of $1,400 for an appropriate private health insurance policy for the period 1 July 1998 to 30 June 1999. There was no entitlement to a reduced premium or tax offset under PHIIS. Ted is entitled to premium reduction under the premiums reduction scheme in relation to the period 1 January 1999 to 30 June 1999. The premium will therefore be reduced by 30% of $1,400 * 181/365 ($208.27).

Effect on entitlement where premium was reduced under PHIIS

4.43 New subsection 12-5(6) is a transitional measure that applies to premiums paid on or before 31 December 1998 for an appropriate private health insurance policy and the premium has been reduced under PHIIS. Where the premium payable in respect of a period after 31 December 1998 is less than otherwise would have been payable because a premium reduction has already been obtained under PHIIS, the premium reduction under the new scheme for that period is reduced accordingly.

Meaning of incentive amount

4.44 New subsection 20-10(1) provides a meaning for the term incentive amount. This is the same as the annual incentive amounts included in section 5-4 of the PHIIA. The amount of the incentive depends on whether premiums are paid for the whole or part of the financial year:

·
if the premiums are paid for the whole of the financial year the incentive amount is as follows:

  Hospital only Ancillary only Hospital and ancillary
3 or more persons (family) $350 $100 $450
One dependent child and one other person (family) $350 $100 $450
Couple (neither a dependent child) $200 $50 $250
Individual $100 $25 $125

·
if the premiums are paid for part of a financial year the incentive amount is calculated on a pro rata basis. The amount is calculated using the formula in new subsection 20-10(2) . The result of the formula is that the full year incentive amount applicable to the circumstances is apportioned according to the amount of the year (ie. number of days) the premiums cover.

Who is a participant in the premium reductions scheme

4.45 An individual is a participant for a financial year in respect of an appropriate insurance private health policy if:

·
where the financial year is the financial year that began on 1 July 1998 - the individual is registered under PHIIS immediately before 1 January 1999 in respect of the policy;
·
where the financial year is the financial year that began on 1 July 1998 or a later financial year - the individual has registered or applied to be registered under the premiums reduction scheme in respect of the policy for the financial year and the registration has not been refused. [New subsection 12-10(1)]

4.46 An individual who is registered in respect of a policy on 30 June in a financial year is taken to be a participant for the month of July in the subsequent financial year even if they have not submitted an application for the subsequent financial year. [New subsection 12-10(2)] This provision allows an individual a month at the end of the financial year to renew registration for the following financial year.

Reimbursement of health funds

4.47 Part 6 of the Bill sets out how health funds can participate in the premiums reduction scheme and how the Government reimburses them for the reductions in premiums made under the scheme.

How do health funds become participating funds?

4.48 A health fund that was for the purposes of PHIIS a participating fund for the 1998-99 financial year will be taken to be a participating fund in respect of the same financial year for the purposes of the new premiums reduction scheme. [New subsection 14-5(1)]

4.49 A health fund may apply to the Minister to become a participating fund for the 1998-99 financial year or a later financial year. [New subsection 14-5(2)]

4.50 The fund will be a participating fund if the Minister approves the application. [New subsection 14-5(3)]

Requirement for applications

4.51 The application must:

·
be in a form determined by the Minister;
·
include such information as determined in writing by the Minister;
·
be signed by the person who is the public officer of the health fund for the purposes of the National Health Act 1953; and
·
include an undertaking from the public officer of the fund that the fund will participate in the premium reduction scheme until the end of the financial year in question. [New subsection 14-10(1)]

4.52 The application must be made no later than 2 months, or such shorter period as is determined by the Minister, before the start of the financial year in question. If a fund becomes registered under Part VI of the National Health Act 1953 during a financial year, the application must be made as soon as practicable after the fund is registered. [New subsection 14-10(2)]

Consideration of applications

4.53 The Minister is required to approve an application by a health fund to be a participating fund subject to the condition set out in new subsection 14-15(2) . [New subsection 14-15(1)] A rejection by the Minister of an application is a decision reviewable by the Administrative Appeals Tribunal.

4.54 The Minister must not approve an application by a health fund for a financial year if the health fund failed to comply in the previous financial year with any of the conditions for participation in the premium reduction scheme which are prescribed by regulation. [New subsection 14-15(2)]

Notice of Minister's decision

4.55 The Minister must notify the applicant health fund in writing of a decision to approve or reject an application to participate in the premium reduction scheme within 28 days of receiving the application. [New subsection 14-20(1)]

4.56 If the Minister rejects an application, the notice must set out reasons for the rejection. [New subsection14-20(2)] A decision by the Minister to reject an application is a decision reviewable by the Administrative Appeals Tribunal.

How are health funds reimbursed?

4.57 A health fund that is a participating fund in a financial year may claim reimbursement for premium reductions from the HIC on a monthly basis. [New subsection 15-5(1)]

4.58 The HIC must pay to the health fund the amount calculated for a month in accordance with new section 15-15 . [New subsection 15-5(2)]

Requirement for claims

4.59 A claim by a health fund for a month must be made to the HIC on or before the last day of the notification period for the following month. New section 20-5 defines notification period to be the period starting on the first day of the month and finishing on the seventh day of the month. [New subsection 15-10(1)]

4.60 A claim by a health fund must contain such information as the Managing Director of the HIC determines in writing. [New subsection 15-10(2)]

4.61 The details that the Managing Director may determine in writing includes, but is not limited to, details about any or all of the following private health insurance policies issued by the health fund:

·
policies that were on the first day of the month policies in respect of which persons were participants in the scheme;
·
policies that had been at any time before that day policies in respect of persons who were participants in the scheme. [New subsection 15-10(3)]

4.62 For the purposes of new subsection 15-10(2) , the Managing Director of the HIC cannot determine that the participating fund provide the tax file number of any person or any information about the physical, psychological or emotional health of any person. [New subsection 15-10(4)]

4.63 Determinations under new subsection 15-10(2) are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901. [New subsection 15-10(5)]

Amounts payable to the health fund

4.64 The amount payable to the health fund in respect of the month is determined according to the amount by which premiums paid for the month have been reduced under the premiums reduction scheme. [New subsection 15-15(1)]

4.65 The amount must be paid to the health fund on or before the 15th day of the following month (or if that day is not a business day, the first business day after that day). New subsection 15-15(2)]

4.66 The amount must be paid in a manner determined, in writing, by the Managing Director of the HIC. [New subsection 15-15(3)]

Notifying health funds if amount is not payable

4.67 The HIC must notify a health fund if it decides that an amount to reimburse a health fund for a premium reduction is not payable in respect of a private health insurance policy. [New subsection 15-20(1)]

4.68 The notice must include reasons for the decision. [New subsection 15-20(2)]

4.69 The HIC is taken to have decided that the amount is payable if it does not give notice of its decision that the amount is not payable on or before the 15th day of the following month (or, if that day is not a business day, the first business day after that day) if the amount had been payable or would have been payable on or before that time. [New subsection 15-20(3)]

Reconsideration of decisions

4.70 A health fund may request the HIC to reconsider its decision not to pay a claim for reimbursement. [New subsection 15-25(1)]

4.71 The request must:

·
be in writing;
·
set out the reasons for the request; and
·
be made on or before the first day of the month following the month during which the HIC gave the notice (or if that day is not a business day then the first business day after that day). [New subsection 15-25(2)]

4.72 The HIC must reconsider the decision and affirm, vary or revoke the decision as soon as practicable after receiving the request. [New subsection 15-25(3)]

4.73 Decisions by the HIC on reconsideration are decisions reviewable by the Administrative Appeals Tribunal.

4.74 If the HIC revokes a decision, revocation is taken to be a decision that the amount in question is payable. [New subsection 15-25(4)]

4.75 If the HIC varies a decision, the decision has effect, and is taken to always have had effect in accordance with the variation. [New subsection 15-25(5)]

4.76 The HIC is required to notify the health fund stating its decision on the reconsideration of a decision together with a statement of its reasons for its decision. [New subsection 15-25(6)]

4.77 The HIC is taken to have revoked the decision if it does not notify the health fund of its decision on the reconsideration within 28 days after receiving the request. [New subsection 15-25(7)]

Administration provisions

Audits by the HIC

4.78 The HIC may, at any time, audit the accounts and records of health funds that are or have been participating in the premium reduction scheme. [New subsection 16-5(1)]

4.79 An audit must relate only to the fund's accounts and records to the extent that they deal with participation by persons in the premiums reduction scheme, reduction of the premiums under the scheme, and receipt of money from the HIC under the scheme. [New subsection 16-5(2)]

4.80 The HIC must not carry out an audit unless it has notified a fund in writing that it intends to conduct an audit. [New subsection 16-5(3)]

4.81 Health funds are required to ensure that the HIC has access to all accounts, papers, records and documents necessary for the audit. [New subsection 16-5(4)]

4.82 Persons carrying out the audit may make copies of, or take extracts from, any documents relevant to the audit. [New subsection 16-5(5)]

4.83 The HIC may take into account a report under section 82PA of the National Health Act 1953 in considering whether or not to conduct an audit. [New subsection 16-5(6)]

HIC may require production of applications

4.84 The HIC may, by written notice to a health fund, require the health fund to produce to the HIC, within the period and in the manner specified in the notice, registration applications retained by the health fund, or to make copies of these applications and give them to the HIC within the period and in the manner specified in the notice. [New subsection 16-10(1)]

4.85 The period specified in the notice requiring the health fund to produce registration applications must not be less than one month. [New subsection 16-10(2)]

4.86 A health fund is entitled to be paid by the HIC reasonable compensation for complying with a request to make copies of applications and providing them to the HIC. [New subsection 16-10(3)]

Chapter 5 - Tax offset

Explanation of the amendments

5.1 The amendments contained in Schedule 2 to the TLA(PHI) Bill will insert new Subdivision 61-H in the ITAA 1997 to provide a tax offset for persons who take out or maintain private health insurance and make other consequential changes necessary to make the offset a refundable tax offset. Schedule 1 of the TLA(PHI) Bill makes consequential changes to the ITAA 1936.

5.2 The offset is designed to mirror as closely as possible the incentive payments scheme in the PHII Bill. Hence the entitlement to the offset is largely determined by reference to entitlement to private health insurance incentive payments under that Bill as outlined in Chapter 3 above.

Amendments to the ITAA 1997

New Part

5.3 Item 11 of Schedule 2 inserts new Subdivision 61-H which comprises new sections 61-330 to 61-345 . The Subdivision determines entitlement to the offset and the amount of the offset. [New section 61-330]

Private health insurance tax offset is a refundable offset

5.4 The amount of the offset as calculated in accordance with the new scheme is a refundable offset. This means that the full benefit is passed on by refunding the amount, if any, by which that benefit exceeds tax assessed. This would apply to persons who have a relatively small amount of tax assessed. A refundable offset operates in a similar way to tax instalment deductions. A taxpayer's tax instalments deducted during the course of the year are applied against the tax assessed and any surplus is refunded to the taxpayer. The refundable tax offset rules are contained in new Division 67 . [New subsection 61-335(6)] See paragraphs 5.27 and 5.28 below.

Entitlement to the private health insurance tax offset

5.5 Subject to the one exception detailed below, the private health insurance tax offset is available only to individuals. It is not available to individuals in their capacity as an employer. In circumstances where an employer pays for private health insurance on behalf of an employee as a fringe benefit, then it is the employee who will be entitled to the offset. Generally, two conditions must be satisfied for an individual to be eligible for the tax offset in an income year. [New subsection 61-335(1)]

5.6 Firstly, the individual, or the individual's employer, as a fringe benefit, must pay a premium or an amount in respect of a premium under an appropriate private health insurance policy as defined in the PHII Bill, discussed above at paragraph 3.6. The amount paid can be in respect of cover under the policy for the 1998-99 or any later income year. [New subsection 61-335(2)]

5.7 This means that where, say, an individual pays a premium for cover in respect of more than one income year or parts of more than one income year the offset will be calculated by reference to the total amount of the premium paid for that cover. An offset will be allowed in an income year even where the amount paid is in respect of cover for that income year and/or any other income year. In these circumstances, the successive application of the calculation provisions in new section 61-340 may be required to calculate the actual offset amount in an assessment for an income year.

5.8 The need for the amount of the offset to be calculated in respect of cover for each year of income arises because each amount needs to be compared to the annual benefit under the PHIIS scheme where an eligible person may be entitled to that annual benefit.

5.9 Secondly, for an offset to be allowed in an assessment for an income year, the premium must be paid in that income year. The exception to this rule is where the premium was paid prior to the 1998-99 income year. Where an individual paid a premium before that income year (and the premium was in respect of cover after on or after 31 December 1998) the offset is allowed in the 1998-99 income year. [New subsection 61-335(3)]

5.10 Trustees who are liable to be assessed under section 98 of the ITAA 1936in respect of a share of a trust estate are entitled to the offset if the beneficiary who is presently entitled to that share of the trust estate would be eligible for the offset if his or her taxable income was limited to that share. [New subsection 61-335(4)] Section 98 of that Act provides for the assessment of trust income where the presently entitled beneficiary of that income is under a legal disability.

5.11 However, a taxpayer is not entitled to an offset under this scheme:

·
if an incentive payment has already been paid under Chapter 2 of the PHII Bill [new paragraph 61-335(5)(a)] ; or
·
if the payment has already been reduced by the premium reduction scheme in Chapter 3 of the PHII Bill [new paragraph 61-335(5)(b)] ; or
·
in respect of any premium attributable to a period before 1 January 1999. [New subsection 61-340(7)]

Example 1: incentive payment already received On 15 April 1999 Tracey spends $1,000 on a 6 month premium for hospital and ancillary cover. She is taking out health insurance for the first time and claims an incentive payment of 30% of $1,000 ($300). When Tracey lodges her tax return for the 1998-99 income year, she cannot claim an offset for this amount as she has already received the benefit as an incentive payment.

Example 2: premium for cover before 1 January 1999 Brendan paid a premium on 1 December 1998 for cover which expires on 30 November 1999. He is not entitled to an offset under the new scheme for that part of the premium which relates to the period before 1 January 1999.

Amount of the tax offset

5.12 As the offset is designed to mirror as closely as possible the incentive payment available under the PHII Bill, the amount of the offset will be equal to the amount of the incentive payment that an eligible person would have been entitled to in respect of that policy.

5.13 Where the taxpayer was registered or entitled to be registered under the PHIIA 1997, the offset available to the taxpayer is the greater of either 30% of premiums paid or an incentive amount equal to that available under the former scheme. This ensures the benefit available to a taxpayer is no less than that which would have been available under PHIIS had a person been registered or entitled to be registered in respect of a policy under that scheme in the 1998-99 financial year. The incentive amount is worked out under new section 61-345 (see paragraph 5.27).

5.14 The offset is available in respect of the premium paid or an amount paid in respect of a premium either by the taxpayer or by the taxpayer's employer where that payment is a fringe benefit.

5.15 The calculation provision for the offset is divided into two parts. Where the premium paid is in respect of cover for the 1998-99 income year new subsections 61-340(1), (2) and (3) will apply. The amount of offset where the premium paid is in respect of cover for later years is determined by new subsections 61-340(4), (5) and (6) .

5.16 Where there is no person registered or eligible to be registered before 1 January 1999 in respect of the relevant policy under the PHIIA 1997,the calculation is the same irrespective of whether it was in respect of amounts paid in respect of cover for the 1998-99 or later income years. [New subsections 61-340(2) and (5)]

5.17 The amount of the offset is 30% of the amount paid for cover in respect of each year of income.

Example 3: premiums paid and person not registered, or entitled to have been registered under the Private Health Insurance Incentives Act 1997 Ken and Helen have an appropriate private health insurance policy that covers them and their dependent child, Penelope. However, because of income tests, they were not entitled to any incentive amount under the PHIIA 1997. This means that the incentive payment to which Helen is entitled, as the person who pays the premiums, is 30% of the premium; she cannot receive the incentive amount if this was greater because she was never entitled to an incentive under the former scheme.

5.18 Where there is such a person registered or eligible to be registered, the calculation for cover in respect of the 1998-99 year is different from the calculation for later years.

5.19 A person would be eligible to be registered before 1 January 1999 if he or she satisfies the eligibility criteria and had started to pay premiums before that date. The person may not have so registered because he or she intended to claim the tax offset under Subdivision 61-G of the ITAA 1997.

5.20 For the 1998-99 income year the amount of the offset is the greater of:

·
30% of the amount paid or the amount that would have been payable if the premium had not been reduced under PHIIS in respect of cover for that year; and
·
the annual incentive amount in relation to the policy (see paragraph 5.27) for that year. [New subsection 61-340(3)]

Example 4: premiums paid in the 1998-99 income year Natalie has a policy which provides both hospital and ancillary cover for herself and her children. She paid a six-monthly premium for the period 1 September 1998 to 28 February 1999, and was entitled to be registered under the PHIIA 1997for the 1998-99 income year. However, she was not registered and did not receive a premium reduction. The gross amount of the premium was $950.Under the new scheme, Natalie is entitled to claim an offset under new Subdivision 61-H in respect of the premiums she paid for cover from 1 January 1999. Natalie will be entitled to an offset under Subdivision 61-G of the ITAA 1997 for that part of the premium that relates to the period before 1 January 1999. To work out how much offset she is entitled to for cover from 1 January 1999 she must compare her entitlement in respect of the policy under both the former and new schemes. Natalie can claim the greater of:

(i)
30% of $950 * 59/365 ($46.05); and
(ii)
$450 * 59/365 ($72.70).

Natalie would, therefore, be entitled to claim an offset of $72.70 under the new scheme for the period 1 January to 28 February 1999.

5.21 For all later years of income the amount of the offset is the greater of:

·
30% of the amount paid in respect of cover for the year; and
·
the annual incentive amount in relation to the policy (as set out in paragraph 5.27) for the year. [New subsection 61-340(6)]

5.22 As set out above, the successive application of the calculation provisions of new section 61-340 may be required to calculate the actual offset amount in an assessment for an income year where, say, an amount is paid that is for cover in respect of two or more income years.

5.23 In all calculations, amounts paid that relate to cover before 1 January 1999 are to be disregarded. [New subsection 61-340(7)]

5.24 Under new subsection 61-340(8) the amount of offset which a taxpayer can claim must be reduced by the amount of any premium reduction they received under the PHIIS.

Example 6: offset to be reduced by premium reduction If Susan was notionally entitled to an offset of $375 because of the operation of new subsections 61-340(1) to (7) but had received a premium reduction of $100 under the former scheme, then the amount of offset which she is entitled to claim is reduced to $275.

5.25 Items 9 and 10 of Schedule 2 make some minor changes as a result of new Subdivision 61-H . The first amends the heading relating to the offset available under the PHIIA 1997 and the second makes a signposting change.

5.26 Item 15 of Schedule 2 inserts a definition of incentive amount into the ITAA 1997 Dictionary.

Meaning of incentive amount

5.27 New subsection 61-345(1) provides a meaning for the term incentive amount. This is the same as the annual incentive amounts included in section 5-4 of the PHIIA 1997. The amount of the incentive depends on whether premiums are paid for the whole or part of the financial year:

·
if the premiums are paid for the whole of the financial year the incentive amount is as follows:

  Hospital only Ancillary only Hospital and ancillary
3 or more persons (family) $350 $100 $450
One dependent child and one other person (family) $350 $100 $450
Couple (neither a dependent child) $200 $50 $250
Individual $100 $25 $125

·
if the premiums are paid for part of a financial year the incentive amount is calculated on a pro rata basis. The amount is calculated using the formula in new subsection 61-345(2) . The result of the formula is that the full year incentive amount applicable to the circumstances is apportioned according to the amount of the year (ie. number of days) the premiums cover.

Refundable tax offset rules

5.28 Item 14 of Schedule 2 inserts new Division 67 which sets out the rules about refunds of tax offsets. This is explained in new section 67-10 . New section 67-20 makes it clear that new Division 67 will not apply unless an offset is stated as being subject to new Division 67 .

5.29 New subsection 67-25(1) explains that a person can get a refund in relation to a tax offset if the amount of the offset exceeds the amount of income tax the person would have to pay if that person had not got the offset and had not got any tax offsets of a higher priority (the order of priority is shown in new subsection 67-25(2) ). The operation of new Division 67 is demonstrated in the following example:

Example 7: order in which offsets are taken into account

Tax liability before taking offsets into account $1,000
Private health insurance tax offset $600
Other tax offsets $900
Under new subsection 67-25(1) the other offsets must be taken into account first because they are of a lower priority than the private health offset as per new subsection 67-25(2) . After taking into account other offsets, the tax liability is reduced to $100. After then taking into account the private health insurance offset, the taxpayer is entitled to a refund of $500. [New subsection 67-30]

Impact on tax payable of a refundable tax offset

5.30 Item 1 of Schedule 2 makes a change to section 4-10 of the ITAA 1997. The section explains how to work out how much income tax a person must pay and is amended so that where an offset exceeds tax assessed the excess can be refunded in certain circumstances.

5.31 Items 2 and 3 of Schedule 2 insert new subsection 4-10(3A) to explain that if a private health insurance tax offset exceeds a person's tax liability, after allowing for other tax offsets, they are entitled to a refund of the excess.

5.32 Item 12 of Schedule 2 revises the list showing the order in which offsets are taken into account in determining any offset amount to be carried forward under Division 65.5.33 Item 13 of Schedule 2 makes a signposting amendment.

List of tax offsets

5.34 Item 4 of Schedule 2 amends the table in section 11-15 which is an index of exempt income, to include a private health insurance incentive payment.

5.35 Item 5 of Schedule 2 adds the private health insurance offset contained in new Subdivision 61-H to the list of offsets in section 13-1.

Exempt payments

5.36 In order to exclude from a person's assessable income incentive payments received under Chapter 2 of the PHII Bill, item 7 of Schedule 2 amends the heading of Subdivision 52-D and item 8 of Schedule 2 inserts new section 52-125 to make it clear that an incentive payment is exempt from income tax. Item 6 of Schedule 2 makes a technical correction by amending the Table of Subdivisions in section 52-1 to include a reference toSubdivision 52-D.

Amendments to the Income Tax Assessment Act 1936

Information exchange

5.37 Item 1 of Schedule 1 amends paragraph 16(4)(fb) to allow the Commissioner, a Second Commissioner, a Deputy Commissioner or an authorised officer to disclose information to the HIC they are otherwise required to keep secret under subsection 16(2). The disclosure of this information has to be for the purpose of the administration of the PHII Bill.

5.38 Item 5 of Schedule 1 inserts new section 264BB , which mirrors section 264B that was inserted with the introduction of the PHIIA 1997 to assist the Commissioner in ensuring compliance with the tax offset. Under new section 264BB the Commissioner can ensure that taxpayers claiming the offset in fact hold private health insurance. Without the ability to match data provided by health funds, the cost to the community of ensuring compliance would be greatly increased and may make such compliance action uneconomic.

5.39 Other than the taxpayer, health funds are the only source of information concerning private health insurance and the amendment will allow the Commissioner to require health funds to provide information in respect of both the PHIIA 1997 and the new scheme.

Separate net income

5.40 An incentive payment received under the PHII Bill will be excluded from the definition of separate net income in subsection 159J(6) in the same fashion as an amount of child care assistance or child care rebate is excluded. Item 2 of Schedule 1 inserts new paragraph 159J(6)(aac) in the definition to make it clear that such an amount is not to be taken into account in determining a person's eligibility for dependant rebates or the amount of such a rebate to which they are entitled.

Time period for amending assessments

5.41 Item 3 of Schedule 1 inserts new paragraph 170(10AA)(n) to give the Commissioner the ability to amend an assessment at any time in order to allow an offset for private health insurance under new Subdivision 61-H of the ITAA 1997.

Provisional tax

5.42 The offset will be available on assessment only, and so will not be taken into account when calculating provisional tax. This was also the case with the offset available under the PHIIA 1997. Item 4 of Schedule 1 amends subsection 221YCAA(2A) which provides that the private health insurance offset calculated under either Subdivision 61-G or new Subdivision 61-H of the ITAA 1997 is not to be taken as a rebate for the purposes of the definition of qualifying reductions in relation to calculating the uplifted provisional tax amount under section 221YCAA. Taxpayers desiring a periodic benefit from the scheme can apply for an incentive payment or select the option of having a premium reduction to avoid any delay in receiving the incentive.

Chapter 6 - Provisions applying to both the incentive payments and premiums reduction

Explanation of the amendments

6.1 Chapter 4 of the PHII Bill contains general provisions that relate to both the incentive payments scheme and premiums reduction scheme. It includes provisions dealing with the recovery of debts owed either by individuals or health funds under either scheme, secrecy provisions and other miscellaneous provisions. It also includes a dictionary of defined terms which have not been dealt with in previous Chapters.

How and when payments are recovered

Recovery of payments

6.2 Under the scheme the following amounts may be recoverable as debts owing to the Commonwealth:

·
a payment made under the incentive payments scheme to which an individual was not entitled - this could include an amount that was wrongly claimed by an individual under the scheme or an amount incorrectly paid;
·
so much of a payment made under the incentive payments scheme that has been made to an individual that relates to a refunded premium - eg. where a policy is cancelled after the 30% benefit has been paid;
·
a reimbursement made to a health fund by the HIC and the reimbursement relates to a policy that covers a person who was not eligible to participate in premiums reduction scheme for the financial year in question;
·
150% of a reimbursement made by the HIC to a health fund in respect of a policy under which the health fund did not give a premium reduction;
·
150% of a reimbursement made by the HIC to a health fund in respect of a person whose application for registration under new section 11-15 in respect of a financial year has not been retained by the fund as required by new section 11-50 ;
·
150% of a reimbursement made by the HIC to a health fund in respect of a person whose application for registration has been retained by the fund but has not been produced as required by the HIC under new section 16-10 ;
·
so much of a reimbursement that was paid by the HIC to a health fund under new section 15-5 that was not payable; and
·
interest imposed under new subsection 18-10(2) on outstanding amounts. [New subsection 18-5(1)]

6.3 Where an amount is recoverable in relation to an incentives payment, including interest, the amount is recoverable from an individual or the individual's estate. Where an amount is recoverable in relation to a reduction in premiums, including interest, the amount is recoverable from the health fund. [New subsection 18-5(2)]

6.4 The above amounts are recoverable debts even though a person has been convicted of an offence relating to the payment. [New subsection 18-5(3)]

Interest on amounts recoverable

6.5 If the Managing Director of the HIC has issued a notice to a health fund, an individual or a deceased person's legal personal representative in regard to a debt owed under the scheme and:

·
an arrangement has been entered into with the Managing Director for the repayment of the outstanding amount and there has been a default of a payment owed under the arrangement; or
·
at the end of the period for entering into such an arrangement there are still amounts outstanding;

then interest becomes payable on the unpaid amount from and including the day after the relevant period. [New subsection 18-10(1)]

6.6 Interest is payable at a rate specified in the regulations or if no rate is specified at a rate of 15% per annum. [New subsection 18-10(2)]

6.7 The period for entering into an arrangement referred to in paragraph 6.5 above is a period of 3 months after the Managing Director has served a notice. The Managing Director may extend the period for entering into an arrangement. [New subsection 18-10(3)]

6.8 Even though the Managing Director is authorised to impose interest, a court may order that interest is taken to be payable from a date later than the date specified in paragraph 6.7 above. [New subsection 18-10(4)]

Write off, waiver and payment by instalments

6.9 The Managing Director may, on behalf of the Commonwealth, make a written determination:

·
writing off of an amount that an individual owes to the Commonwealth under the scheme;
·
waiving the right of the Commonwealth to recover from an individual the whole or part of an amount that the person owes to the Commonwealth under the scheme; or
·
allowing an individual to pay an amount owed to the Commonwealth under the scheme by instalments. [New subsection 18-15(1)]

6.10 The determination is to take effect:

·
on the day specified in the determination, being the day on which it is made or on any earlier or later day; or
·
if no day is specified - on the day the determination is made. [New subsection 8-15(2)]

6.11 If a determination referred to above is made in relation to the individual, the Managing Director must cause notice of the determination to be served on the person. [New subsection 18-15(3)]

6.12 A decision by the Managing Director not to make a determination is reviewable by the Administrative Appeals Tribunal.

Use of information relating to another person

6.13 A person who:

·
uses, makes a record of or discloses or communicates to any person any information that relates to the affairs of another person that was acquired under or for the purpose of this legislation; and
·
the use, making of the record, disclosure or communication was not carried out in the performance of a function or obligation, or the exercise of a power under this legislation;

is guilty of an offence. The maximum penalty is 2 years imprisonment. [New section 19-5]

Review by Administrative Appeals Tribunal

6.14 An individual may make an application to the Administrative Appeals Tribunal for a review of:

·
a decision by the HIC under new section 6-20 to refuse a claim under the incentive payments scheme;
·
a decision by the HIC refusing to register a person under new section 11-25 in respect of an appropriate private health insurance policy for a financial year;
·
a decision by the HIC under new subsection 11-40(1) to revoke a person's registration in respect of an appropriate private health insurance policyother than where a person merely wishes to have their registration cancelled;
·
a decision by the Minister to reject an application under new section 14-5 by a health fund to become a participating fund;
·
a decision by the HIC under new subsection 15-25(3) on reconsideration of a decision that an amount is not payable in respect of an appropriate private health insurance policy included in a claim under new section 15-10 ; or
·
a decision by the Managing Director of the HIC not to make a determination under new section 18-15 to write off, waive, or allow a person to pay by instalments any recoverable amounts. [New section 19-10]

Information to be provided to the Commissioner of Taxation

6.15 The HIC must, within 90 days of the end of each financial year, give the following information to the Commissioner of Taxation:

·
the name, date of birth and residential address of each person who:

-
paid a premium under an appropriate private health insurance policy for that financial year;
-
received a payment under the incentive payments scheme in respect of the premium; and
-
was a participant in the premiums reduction scheme in respect of an appropriate private health insurance policy for that financial year;

·
the name of the health fund that issued the policy;
·
the type of cover provided by the policy;
·
the total amount of payments made to the health fund in respect of the policy;
·
the period in respect of which those payments were made;
·
the name and date of birth of all other persons covered by the policy for which payments were made; and
·
whether, at any time during the financial year, any person covered by the policy was a dependent child. [New section 19-15]

Exclusion of certain State insurance

6.16 To avoid any possible doubt it is made clear that the PHII Bill does not apply in respect to State insurance that is confined to the State concerned. State insurance means insurance activities carried on by a State, ie. as insurer, as part of its governmental activities. This provision is included because under section 51(xiv) of the Constitution the Commonwealth cannot legislate with respect to State insurance. [New section 19-20]

False or misleading information

6.17 A person is guilty of an offence if the person gives any information to the HIC or to a health fund that the person knows is false or misleading in a material particular. [New section 19-25] The maximum penalty for such an offence is imprisonment for 12 months.

Application of the Criminal Code

6.18 Chapter 2 of the Criminal Code which sets out the general principles of criminal responsibility applies to all offences under the PHII Bill. [New section 19-30]

Appropriation

6.19 The Consolidated Revenue Fund is appropriated for the purpose of making payments under the new scheme. [New section 19-35]

Regulations

6.20 The Governor-General may make regulations prescribing matters which are required or permitted by the PHII Bill to be prescribed or are necessary or convenient to be prescribed for carrying out or giving effect to the PHII Bill. [New section 19-40]

Other definitions not previously dealt with

What is a business day?

6.21 A business day means a day other than a Saturday, a Sunday or a public holiday in the place concerned.

What does court refer to?

6.22 The reference to court includes any tribunal, authority or person having power to require the production of documents or the answering of questions.

Who is a dependant child?

6.23 A child is a dependent child if:

·
the child is under the age of 18 years, or a full-time student under the age of 25 years;
·
the child is covered by an appropriate private health insurance policy and the health fund that issued the policy accepts the child as a dependent child for the purposes of the policy;
·
the child is not a partner of another person (see definition of partner below).

What is a fringe benefit?

6.24 Fringe benefit means:

·
a fringe benefit as defined in subsection 136(1) of the FBTAA 1986;
·
a benefit that would be a fringe benefit if paragraphs (d) and (e) of the definition of employer in subsection 136(1) were omitted.

Who is the Managing Director?

6.25 The Managing Director means the Managing Director of the HIC.

Who is a partner?

6.26 A partner, in relation to another person, means:

·
a person who is legally married to the other person and is not living separately or apart from the other person on a permanent basis;
·
a person who, although not legally married to the other person, lives with the other person on a bona fide domestic basis as the husband or wife of the other person.

What does tax file number mean?

6.27 It means tax file number as defined in section 202A of the ITAA 1936.

What is the meaning of you?

6.28 The word you is used in the PHII Bill. It means an individual but does not include an individual in the capacity of a trustee or in the capacity of an employer.

Chapter 7 - Closing off the Private Health Insurance Incentives Act 1997

Explanation of the amendments

7.1 Item 1 of Schedule 1 repeals subsection 4-3(6) that provides an application for registration may be made at any time before or during the relevant financial year. People can participate in the incentives scheme provided for by the PHIIA 1997 by applying for registration with their health fund or alternatively by claiming a tax offset (provided for by Subdivision 61-G of the ITAA 1997). However, some people who had intended to apply for a tax offset at the end of the financial year found they had insufficient tax assessed to allow them to claim the full rebate. These people need to be able to make a retrospective application with their health fund to claim via a premium reduction that amount of tax offset they were unable to utilise.

7.2 New subsection 4-3(6) extends the period of registration for the 1997-98 financial year to 31 December 1998 and for the 1998-99 financial year to 31 December 1999.

7.3 Item 2 of Schedule 1 amends subsection 5-1(1) which provides for premiums to be reduced by the amount of the incentive payment for either the whole year or part of the year depending on the period of cover. This item makes the amount of premium reduction further subject to any tax offset that may have been received by reference to new subsection 5-1(1A) introduced under item 3 (see below).

7.4 Item 3 of Schedule 1 inserts new subsection 5-1(1A) . This item provides that where a person has received a tax offset under the incentive scheme and the amount of tax offset is less than the amount that he or she would have been entitled to as an incentive payment then the incentive payment is to be reduced by the amount of the tax offset. However, if the offset is equal to or greater than the amount by which the premium would otherwise be reduced, no reduction in the premium is to be made.

7.5 Item 4 of Schedule 1 inserts new paragraphs 5-1(2)(e) and 5-1(2)(f) . Subsection 5-1(2) describes circumstances where the incentive payment as a premium reduction does not apply.

7.6 New paragraph 5-1(2)(e) provides that advance payments made on or before 31 December 1998covering periods after that date will be eligible for a premium reduction except for any part of an advance payment that is made in relation to a period of cover after 30 June 1999.

7.7 New paragraph 5-1(2)(f) provides that all payments made after 31 December 1998 are excluded from the premium reduction scheme. Persons making payments after that date are covered by the replacement scheme.

7.8 Item 5 of Schedule 1 inserts new paragraph 8-4(1)(c) . This item provides for an adjustment to amounts payable to a health fund if there has been no premium reduction.

7.9 It also allows for reductions in payments to health funds where a premium was only partly reduced. This would occur where the relevant participant in the scheme receives an insufficient tax offset. In such a case the participant receives a partial reduction in premium.

7.10 Item 6 of Schedule 1 inserts a definition of financial year into the Dictionary contained in Schedule 1 of the PHIIA 1997 to restrict the scheme's operation to those years.

7.11 Item 1 of Schedule 2 repeals the PHIIA 1997 from 1 July 2000. This will allow sufficient time to finalise necessary administrative aspects of the incentive scheme.

Chapter 8 - Regulation impact statement

Regulation impact statement

Specification of policy objective

8.1 The broad policy objective is to increase the proportion of the community covered by private health insurance for the purpose of reducing demands placed on the public health system. As announced by the Government in Tax Reform: not a new tax, a new tax system, this is to be achieved by providing a non-income tested financial incentive to families and individuals to assist with the cost of private health insurance.

Background

8.2 The Government introduced PHIIS from 1 July 1997 as an incentive for persons to take out or maintain private health insurance.

8.3 When introduced on 1 July 1997, singles, couples and families received rebates of up to $100, $200, and $350 respectively for private hospital cover. Premiums for top private hospital cover averaged around $1,230 for individuals and $2,460 for families. Hence the PHIIS provided a subsidy of between 8% and 14% of the cost of private hospital insurance.

8.4 Features of PHIIS include:

·
it is income tested, ie. it is only available to individuals with a taxable income under $35,000 or to a couple or family with a combined taxable income under $70,000 (plus $3,000 for each dependent child after the first);
·
the benefit can be taken in the form of reduced premiums, or as an income tax offset claimable at the end of the income year[F1] - health funds are reimbursed for premium reductions;
·
a minimum premium must be paid to qualify for the benefit -depending on the type of cover provided by the policy; and
·
the annual incentive amount payable also depends on the type of insurance policy taken out, ie. whether the policy is for hospital cover, ancillary cover, or combined cover.

8.5 The measure involved amending the income tax law to provide for the tax offset and the introduction of a new Act (Private Health Insurance Incentives Act 1997) to allow for reduced premiums.

8.6 As part of the Government's tax reform policy document, it was announced that a new private health insurance benefit is to take effect from 1 January 1999 and will replace PHIIS.

Identification of implementation options

8.7 There is only one feasible design of the incentive package to achieve the Government's broad policy objective: that is, from 1 January 1999, to introduce a 30% tax offset/benefit for appropriate health insurance cover.

8.8 The option ensures that private health insurance cover is more affordable both to individuals and families and is more accessible to a broader range of persons than under PHIIS, which is targeted at low and middle income earners.

8.9 A 30% tax offset/benefit is expected to provide a significant incentive for persons to retain or take up private health insurance and thus reduce the burden on the public health system.

8.10 An individual can claim the benefit by one of the following methods:

·
the direct payment option - an individual can claim reimbursement of the cost of the premium he or she has paid (a network of shopfronts will be available for people to lodge a claim);
·
the premium reduction option - an individual who is covered by the policy can register with a health fund to claim a reduced premium; or
·
an individual can claim the benefit as a refundable tax offset in their income tax return.

8.11 The premium reduction option was not included as an option in the Government's tax reform policy document. It was included following consultations with private health funds who expressed concerns that certain persons (such as aged persons and people in rural and regional areas) may have difficulty in claiming the direct payment from shopfronts. In addition, around 30% of current PHIIS participants pay their premium over the counter at their health fund. The premium reduction option allows individuals to avoid making an up-front payment of the full amount of the premium and then having to go to a shopfront to claim the direct payment. The reduced premium option also caters for people who do not usually lodge tax returns.

8.12 The direct payment or premium reduction option allows for immediacy of the benefit and the ability to claim the benefit as a tax offset/tax credit allows a person to reduce their income tax liability or claim a refund if the offset exceeds their tax liability. A choice was provided under PHIIS where the benefit could be taken as reduced premiums or a non-refundable tax offset.

8.13 There is no estimate of how many persons will claim the benefit by direct payment or reduced premium rather than as a tax offset. Under PHIIS around 65% of recipients claim their benefit as a premium reduction. It is expected that more individuals will claim the benefit by way of direct payment or reduced premium because of its immediacy.

8.14 The direct payment or refundable tax offset will be available only to individuals who actually make the premium payments to the health fund[F2]. This option is intended to encourage persons to make payments to health funds. It allows an individual to access the benefit provided under the scheme even though they are not covered by the policy taken out. Under the premium reduction option, any person other than a dependent child who is covered by an appropriate private health insurance policy can register to obtain a premium reduction. This is similar to what is available under the current PHIIS.

8.15 The new scheme has been designed so that persons who are currently able to benefit under PHIIS will not be worse off than if PHIIS had continued to operate.

8.16 The direct benefit and the premium reduction option will be administered by the HIC. The refundable tax offset option will be administered by the Commissioner of Taxation.

8.17 The implementation option for achieving the Government's policy also provides the following features:

·
the direct payment can be claimed from shopfronts, paid electronically or arranged through the mail;
·
the frequency of the payment of the direct benefit is linked to the frequency of payment of the premiums;
·
to claim a premium reduction, a person covered by the policy must register with a health fund on an annual basis - this requirement exists under PHIIS; and
·
claims for a direct payment can be made during the financial year in which a premium is paid, or up to 12 months after the end of the financial year in which the premium is paid.

8.18 The feature which allows the direct payment to be claimed from shopfronts requires the establishment of an agency network. Details of this arrangement are yet to be completed.

8.19 As with PHIIS, the implementation option involves amending the income tax law to provide for the tax offset and the introduction of new legislation to allow for direct payments and reduced premiums.

Assessment of impact (cost and benefits) of the measures

Impact group identification

8.20 The measure will primarily affect existing members of private health insurance funds who will gain a significant benefit from the reduced cost of private health insurance.[F3] It will encourage these people to retain their health fund membership. It will also affect persons who are encouraged by the new measure to join a private health insurance fund because of the reduced cost of membership.

8.21 The broader access to the incentive is expected to lead to a significant increase in membership of private health insurance funds.[F4]

8.22 Private health insurance funds will benefit because of the positive impact the incentive will have on fund membership. The measure will also have a positive impact on private hospitals, owners of private hospitals and providers of services in private hospitals.

8.23 The measures will affect the HIC which will administer the direct payment and reduction premium options in the new scheme. The HIC will, after 31 December 1998, no longer be required to administer PHIIS.

8.24 The measures will affect the ATO which will administer the refundable tax offset option.

8.25 The measures will also affect the Government via the budgetary cost of the scheme.

Compliance costs

8.26 The compliance costs for persons seeking benefits under the new scheme would generally be the same as under PHIIS. Persons seeking reduced premiums must lodge an application form on an annual basis with the health fund that issued the policy. This is the same requirement as under PHIIS. Persons claiming a direct payment must lodge a claim form.

8.27 Compliance costs will generally be the same for existing members of health funds and those persons who take up membership of a private health insurance fund as a result of the introduction of the new scheme.

8.28 Persons will need to obtain information to determine their eligibility and make a decision whether to claim the incentive as a direct payment, reduced premium or an offset. Presumably, it will take an individual approximately 5 to 10 minutes to read about and understand the payment options, and decide how they should claim it. An explanation of the tax offset for private health insurance and the accompanying rules will be contained in Taxpack.

8.29 Under both schemes, persons have the compliance cost of notifying events that change their entitlement to the direct payments or reduced premiums. The notification requirements are significantly less onerous under the new incentive because it is not income tested, ie. it is not necessary to advise the HIC of changes in or make estimates of income for the relevant income year.

8.30 The main compliance cost for a person claiming the tax offset is the time involved in determining the amount of premiums paid in the income year and including this information on the return form. The calculations for part-year claims are less onerous under the new scheme. This is because no apportionment of the maximum offset is necessary because the offset is based on the amount of premiums paid in the income year.

8.31 Under PHIIS, health funds are required to register applications and provide information to the HIC on applications for registration or matters affecting claims. Under the new scheme the health funds will still have this function in relation to claims for reduced premiums. Health funds will have the administrative cost of claiming monthly reimbursements from the HIC.

8.32 The health funds will have the compliance cost of providing information to the Commissioner of Taxation as required from time to time.

Estimated costs

Administrative costs

8.33 The HIC will be responsible for administering the direct payment and premium reduction option and the ATO for administering the tax offset option.

8.34 The administrative costs of the HIC will increase as a result of it having to administer the direct payments. This will require new systems and administrative arrangements. The payments will be made through shopfronts which will require additional resources.

8.35 In relation to the premium reduction option, the HIC will perform the same administrative functions as under PHIIS. These functions include the cost of monitoring applications for reduced premiums and other information received from health funds, providing monthly reimbursements to health funds, and the recovery of payments. The administrative costs of these functions can be expected to increase compared to PHIIS because the scheme is open to a broader range of persons. The HIC will also determine which funds are eligible to participate in the scheme.

8.36 The ATO will incur additional costs to administer the tax offset. There is already a system in place to provide for the tax offset available under PHIIS. However, this system will need to be modified as a result of the introduction of the new scheme.

8.37 The expected administrative costs of the new scheme are:

1998-99 $m 1999-2000 $m 2000-01 $m 2001-02 $m
14.6 7.8 7.5 7.5

Revenue

8.38 The budgetary impact resulting from the new measures is:

1998-99 $bn 1999-2000 $bn 2000-01 $bn 2001-02 $bn
-1.09 (1) -1.18 -1.27 -1.36
(1)The costing in 1999-2000 differs slightly from that contained in Tax Reform: not a new tax, a new tax system due to a revision of the estimate of the savings flowing from the abolition of PHIIS.

8.39 The start date of 1 January 1999 influences both revenues and outlays and is estimated to have a part-year budgetary cost of around $330m in 1998-99. The fiscal impact includes the removal of PHIIS and the anticipated outlays under the new initiative.

Consultation

8.40 Treasury and the Department of Health and Aged Care have consulted with private health funds on the development and implementation of the measures. Following consultations with the funds, the premium reduction option has been included as a design feature. The private health funds are in agreement with the new scheme.

Conclusion

8.41 The new method of implementing the Government's policy objective (of encouraging more people to take out private health insurance) is not expected to involve any significant change in the compliance and administrative costs currently incurred under the PHIIS.

8.42 The Government will monitor the new scheme to ascertain its effectiveness. It is expected that any difficulties with the implementation of the scheme will be raised with the relevant Government Departments.

Glossary

In this Explanatory Memorandum the following Acts, Bills and terms are referred to by the abbreviations indicated:

Income Tax Assessment Act 1936 ITAA 1936
Income Tax Assessment Act 1997 ITAA 1997
Fringe Benefits Tax Assessment Act 1986 FBTAA 1986
Private Health Insurance Incentives Act 1997 PHIIA 1997
Private Health Insurance Incentives Amendment Bill 1998 PHIIA Bill
Private Health Insurance Incentives Bill 1998 PHII Bill
Private Health Insurance Incentives Scheme PHIIS
Taxation Laws Amendment (Private Health Insurance) Bill 1998 TLA(PHI) Bill
Health Insurance Commission HIC


1 A person is able to move between reduced premiums and the tax offset and vice versa.


2 This will also include an employee whose employer pays premiums on their behalf and it is provided as a fringe benefit


3 In the June quarter of 1998 30.6 % of the population (or 5.7 million persons) were covered by private health insurance.


4 This is stated in the Government's policy document on tax reform at p. 49


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