Explanatory Memorandum(Circulated by authority of the Treasurer, the Rt. Hon. Phillip Lynch, M.P.)
This memorandum explains the provisions of six Bills, the main purpose of which is to give effect to taxation proposals announced in the 1977-78 Budget Speech.
In particular, the Bills will impose the rates of income tax and health insurance levy for the 1977-78 financial year and implement the Budget decision to introduce a new standard rate system of personal income tax.
Under the new system, a three-step rates scale will be substituted for the present seven-step scale. The standard rate of tax is to be 32 per cent and is to apply to all the parts of taxable income above $3,750. Surcharges of 14 per cent and 28 per cent, applying from $16,000 and $32,000 respectively, will bring the effective marginal rates to 46 cents on taxable income from $16,001 to $32,000 and to 60 cents on taxable income above $32,000.
The first $3,750 of taxable income is to be zero-rated (tax-free) and the general concessional rebate is to be discontinued. That rebate of $676, as indexed for 1977-78, had the effect of freeing from tax only the first $3,153 of taxable income.
Expenditure in excess of $1,590 will attract a rebate of 32 cents in the $. Under 1977-78 pre-Budget arrangements a rebate of 40 cents was allowable (in addition to the general rebate of $676) for each $1 of concessional expenditure over $1,690.
The proposed new three-step scale is to have effect from 1 February 1978 for PAYE deductions from salaries and wages and, notionally, for assessment purposes.
The new rate scale, like the existing scale, is to be indexed. The indexation adjustment that is to be applied in fixing the rate scale for 1978-79 is to be not less than one-half of the adjustment provided for in the ordinary indexation rules. For years after 1978-79 the new scale will be fully indexed in accordance with those indexation rules, and there will be full indexation of the dependant rebates that are to apply for 1978-79.
With the introduction of the new system of personal taxation significant changes are proposed in the averaging provisions that may apply in the assessment of a primary producer.
Under the pre-Budget system, the general concessional rebate of $676 was not taken into account in ascertaining the average rate of tax on a primary producer's average income (usually the average for the five years ending with the year of income). The general rebate was deducted only after the rate appropriate to average income was applied to the first $16,000 of the primary producer's taxable income.
Under the new system the zero-rated step (of $3,750) which in effect absorbs the general concessional rebate (of $676) is to be taken into account in calculating a primary producer's average rate of tax. However, taxation at the average rate of tax is to apply only where the average income is less than the taxable income. Where this is the case, the application of the averaging provisions will be beneficial to the taxpayer. As taxation at the average rate will not be applied where taxable income is less than the average income the application of the averaging provisions will not result in a primary producer paying more tax in a year than if the averaging provisions did not apply.
The $16,000 income limit on averaging is to be abolished.
The provisions relating to the assessment of tax payable by trustees are also to be changed.
Where a beneficiary, who is under a legal disability (e.g., infancy), is presently entitled to income of a trust estate, the trustee of the trust is assessed under section 98 on the income. The beneficiary may also, under section 100, be taxed on the same income in which case the beneficiary is allowed a credit for tax paid by the trustee. Where there is income of a trust estate to which no person is presently entitled, the trustee is assessed in pursuance of section 99 or if the anti-avoidance provisions of section 99A apply, the trustee is taxed at the rate of 50 per cent.
Under pre-Budget rules, the general concessional rebate of $676 was not allowable in an assessment under section 99 or 99A. Where section 99 applied no tax was payable if the income was $416 or less and "shading-in" provisions applied to income marginally in excess of $416. Where section 99A applied the 50 per cent rate was payable irrespective of the amount of income subject to tax. Section 99A applied in relation to inter vivos trusts unless, having regard to guidelines in the law, the Commissioner was of the opinion that it would be unreasonable for the section to apply.
Under the new system, the following rules are to apply in the assessment of trustees:
Assessments under section 98
- Except where the trust is an inter vivos trust and the beneficiary is under 16 years of age, the three step rates scale is to apply with the first $3,750 of income being zero-rated.
- Where the trust is an inter vivos trust and the beneficiary is under 16 years of age on the last day of the year of income, the three step scale is also to apply, subject to the first $3,750 of income being taxed at the standard rate of 32 per cent. No tax will be payable where the total trust income in this category for a child is $1,040 or less and where the income is between $1,041 and $2,888 the tax is to be limited to 50 per cent of the excess over $1,040.
Assessments under sections 99 and 99A
- Section 99A is to be capable of application to deceased estates set up for tax avoidance purposes in the same way as it is at present applicable to inter vivos trusts set up for such purposes.
- Where the trustee of a trust estate that is a deceased estate is liable to be assessed under section 99 in respect of income of the year of income in which the deceased person died or either of the next two succeeding years, the proposed three-step rates scale is to apply, with the first $3,750 of income being zero-rated.
- Where section 99 applies in relation to any other trust estate, the three-step rates scale is also to apply but the first $3,750 of income is to be taxed at the standard rate of 32 per cent. However, no tax is to be payable where the income is $416 or less and where the income is between $417 and $1,155 the tax is to be limited to 50 per cent of the excess over $416.
- The rate of tax in assessments under section 99A is to be raised from 50 per cent to the maximum rate under the new system, i.e., 60 per cent. (Correspondingly, trusts constituted as superannuation funds and that do not attract any taxation concessions under the income tax law are to have their rate of tax increased from 50 per cent to 60 per cent.)
- Provisional tax is to be payable in assessments under section 99A, just as it is payable in other assessments of trustees.
As the standard rate system of personal income tax is to have effect from 1 February 1978, special transitional arrangements are to apply for 1977-78. In brief, these are as follows:
- The effective rates of income tax for 1977-78 are to be seven-twelfths of those applicable under 1977-78 pre-Budget arrangements and five-twelfths of those under the new system.
- For taxpayers generally, the resulting level of taxable income at which income tax will commence to be payable is to be $3,403 ($5,336 for a taxpayer entitled to a full rebate for a dependent spouse).
- For primary producers, taxpayers subject to tax by reference to a notional income and trusts liable to tax in pursuance of sections 98, 99 or 99A the tax payable for 1977-78 will in the same general way be seven-twelfths of the tax payable under 1977-78 pre-Budget arrangements and five-twelfths of that payable under the new arrangements.
Other matters consequential on the new system of personal taxation that are covered in the Bills include -
- maintenance of the pre-Budget position that a taxpayer's superannuation contributions in excess of the rebatable limit of $1,200 may be carried forward as an offset against his or her superannuation pension when it is paid;
- allowance to non-resident individual taxpayers of the zero rate applicable to resident taxpayers (non-resident taxpayers have not been allowed the general rebate in the past);
- increases in the taxable income levels at which taxpayers who are not exempt from the health insurance levy become liable to pay that levy.
The Bills also deal with a range of other matters. These are, briefly:
Investment allowance - The termination date by which eligible plant must be ordered, or construction commenced, to qualify for the 20 per cent phase of the investment allowance for income tax purposes is to be extended by 2 years from 30 June 1983 to 30 June 1985.
Private companies - The provisions that establish when a company is a public company for the purposes of Division 7 of the income tax law are to be amended to overcome artificial arrangements entered into with public hospitals and other public bodies to confer public company status on what are essentially private companies.
Allowable capital expenditure - The petroleum mining provisions of the income tax law are to be amended to include within the scope of allowable capital expenditure of a petroleum mining company the cost of a liquefaction plant for use in processing natural gas.
Film royalties paid abroad - As foreshadowed in the Budget, royalties paid from Australia after 16 August 1977 in respect of motion picture films and video tapes are to be taxed at the rate of 10 per cent.
Provisional tax - The provisions under which provisional tax may include an amount of provisional health insurance levy are being amended to more accurately reflect the tax-payer's liability, if any, to the levy.
Health insurance levy - The health insurance levy is not to be payable on income of a deceased estate to which no beneficiary is presently entitled.