Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. J.W. Howard, M.P.)
This memorandum explains the provisions of five Bills, the main purposes of which are to give effect to taxation proposals announced in the 1978-79 Budget Speech.
The first Bill, the Income Tax (Rates) Amendment Bill 1978, will amend the Income Tax (Rates) Act 1976. Its main function is to fix the rates of income tax payable by individuals and trustees generally for the 1978-79 financial year.
In doing that, the Bill will (by clause 10) implement the proposal that as a temporary measure for 1978-79 only, the standard rate of income tax, applicable to the taxable income of individuals that exceeds $3,893, is to be increased from 32% to 33.5%. Surcharges of 14% and 28%, applying from taxable income levels of $16,608 and $33,216 respectively will bring the effective marginal tax rates above those levels to 47.5% and 61.5%.
Further provisions of the Bill (also in clause 10) are associated with the proposal (in clause 11 of the Income Tax Assessment Amendment Bill (No. 2) 1978) to more strictly limit the benefits of the averaging provisions of the income tax law to income from primary production.
The second Bill, the Income Tax Assessment Amendment Bill (No. 2) 1978, will amend the Income Tax Assessment Act 1936. It has a number of features, the main ones of which are as follows:
Commonwealth post-graduate awards (Clauses 3 and 14)
With effect from 1 November 1978, exemption from tax of benefits paid under the Commonwealth Post-graduate Awards Scheme is to be removed.
Lump sum retirement payments (Clauses 4, 5, 9, 13, 14 and 15)
The rule that a taxpayer's assessable income is to include 5% of lump sum payments made in consequence of the retirement from, or the termination of, an office or employment of the taxpayer is to be made inapplicable to certain payments in respect of unused annual leave and long service leave. Broadly, lump sum payments after 15 August 1978 for unused annual leave and lump sum payments after that date for unused long service leave (including payments in the nature of long service leave) for qualifying service after that date will be taxed at no more than the standard rate of tax. Payments in respect of unused annual leave or long service leave to the dependants or personal representatives of deceased employees are to remain exempt from tax.
A lump sum paid after 15 August 1978 to a taxpayer in consequence of retirement from, or the termination of, an office or employment after that date in respect of unused annual leave (including an additional payment such as a leave loading related to that leave) is to be included in the taxpayer's assessable income, but a rebate is to be allowed where necessary to ensure that the amount so included will not bear tax at a rate in excess of the standard rate. Tax instalments at the standard rate of tax (33 1/2% for 1978-79) will be deducted from such payments made on or after 1 November 1978.
Long service leave.
The proposed new basis for the taxing of lump sums in respect of unused long service leave will apply to an amount paid to a taxpayer after 15 August 1978 in consequence of a retirement from, or termination of, an office or employment after that date.
Under the new basis, so much of a long service leave lump sum payment on retirement as is attributable to a period of qualifying service after 15 August 1978 is, basically, to be included in the recipient taxpayer's assessable income, but a rebate is to be allowed where necessary to ensure that the amount so included will not bear tax at a rate in excess of the standard rate (33 1/2% for 1978-79).
The balance, if any, of the lump sum - broadly, so much of it as is attributable to a period of qualifying service up to 15 August 1978 - will continue to be assessable on the existing basis, whereby 5% of it is included in assessable income.
The above rules are to apply also to lump sum payments for leave paid on retirement under a scheme that provides alternative benefits to long service leave, and long service leave used after 15 August 1978 will be taken to have been used first out of long service leave attributable to qualifying service after 15 August 1978.
Tax instalments are to be deducted at the standard rate of tax (33 1/2% for 1978-79) from so much of a payment made on or after 1 November 1978 as is to be included in assessable income under either the new or the old basis of assessment.
Gifts to World Wildlife Fund Australia (Clause 6)
Gifts of the value of $2 or more to the recently incorporated World Wildlife Fund Australia are to be made tax deductible.
Termination of housing loan interest deduction (Clause 7)
The income tax deduction for housing loan interest is to be terminated, with effect from 1 November 1978. Accordingly, for 1978-79, the deduction is to be limited to interest paid by 30 June 1979 to the extent that the payment relates to interest accrued to 31 October 1978. A deduction is no longer to be available for interest that accrues after 31 October 1978 or for any interest paid after 30 June 1979.
Averaging for primary producers (Clauses 8, 10, 11 and 16)
The system under which primary producers benefit through having tax levied on their taxable income at a rate fixed by reference to average income of the year and of the preceding four years is, for 1978-79 and subsequent years, to be varied so as to more strictly confine averaging benefits to income derived from primary production. Averaging benefits will apply to the part of taxable income that is so derived plus up to $5,000 of the part of taxable income derived from other activities. Where the part of taxable income from non-farm sources is greater than $5,000, the amount (if any) that remains after deducting from $5,000 the excess of that income over $5,000 is to be included with primary production income in the income that attracts averaging benefits.
Dependants residing overseas (Clause 12)
Concessional rebates of tax for dependants are to be withdrawn in respect of dependants who are not residents of Australia, with effect from 1 November 1978.
Self-assessment of provisional tax (Clauses 16 and 17)
A safeguard against under-estimation of taxable income for purposes of "self-assessment" of provisional tax is to be varied for 1978-79 and subsequent years of income so as to impose, subject to a power of remission by the Commissioner of Taxation, additional tax where a taxpayer under-estimates the current year's taxable income (other than income from salary or wages) by more than 10%. The additional tax is to be 10% of the full amount by which the provisional tax as reduced pursuant to the self assessment falls short of the lesser of the provisional tax originally notified and the tax actually payable on the taxable income.
Health insurance levy (Clauses 18, 19 and 20)
The health insurance levy is to be terminated, with effect from 1 November 1978.
Rebate of tax in respect of concessional expenditure (Clause 21)
Reflecting the temporary increase for 1978-79 in the standard rate of income tax, the rate of rebate for concessional expenditure (e.g., on medical and education expenses, life assurance and superannuation, municipal rates etc.) in excess of $1,590 is to be increased for 1978-79 from 32% to 33.5%.
Calculation of 1978-79 provisional tax (Clause 22)
Provisional tax for 1978-79 is to be, basically, an amount equal to tax payable for 1977-78 plus an amount to reflect the temporary increase for 1978-79 of 1.5% in the standard rate of tax.
The component of provisional tax that represents the health insurance levy is to reflect the fact that the levy is payable only in respect of the first four months of 1978-79. (The increase in the standard rate of tax and the termination of the health insurance levy are to be reflected in PAYE deductions from salaries and wages made on or after 1 November 1978.)
The third Bill, the Income Tax (Individuals) Bill 1978, will formally impose the rates of tax payable by individuals and trustees for 1978-79. It will also allow a special rebate to remove the detriment for some taxpayers that results from application for 1978-79 of the standard rate scale, as indexed by one-half of the normal indexation adjustment, rather than application of the rate scale that applied prior to the standard rate system, fully indexed.
The fourth Bill, the Income Tax (Companies and Superannuation Funds) Bill 1978, will declare and impose the rates of income tax payable for 1978-79 by companies and trustees of superannuation funds. These rates are the same rates that applied for 1977-78, except that the rate payable by one category of superannuation fund is increased to reflect the full implementation in 1978-79 of the standard rate system, as well as the temporary increase of 1 1/2% in the standard rate of tax.
The fifth Bill, the Health Insurance Levy Bill 1978 will declare and impose the health insurance levy payable for 1978-79. Reflecting the termination from 1 November 1978 of the levy, the rate of levy on 1978-79 taxable income is to be one-third of the full year rate, i.e., 0.833% and levy ceilings are to be one-third of the applicable full year ceiling.
More detailed explanations of clauses of each of the Bills are contained in the notes that follow.