Second Reading Speechby the Treasurer, the Hon. Phillip Lynch, M.P.
This Bill and two others I shall shortly introduce mark the commencement of personal income tax indexation in Australia.
These indexation measures are a turning point in taxation policy in this country.
They are among the most important and far reaching tax reforms ever introduced into this Parliament.
Indexation is to apply to tax on incomes of the year 1976-77 and its effects are to be reflected in PAYE deductions from salaries and wages as from 1 July next.
The Bills are also related to other aspects of the policy package the Government is presenting.
They deal with aspects of the better and fairer system of Family Assistance, and reductions in Government expenditure, that are elements of that package.
I have elsewhere explained the concepts on which personal income tax indexation is based.
Nevertheless, I think that in this speech, which is related so directly to the subject, it would be appropriate for me to reiterate some of my earlier remarks.
There is no doubt that the effects of inflation combined with a progressive income tax rate scale are demonstrably unfair to taxpayers.
For example, an employee sees wages increased, but if they merely keep pace with inflation he knows this does not maintain real income after tax.
Without indexation of the income tax rates scale, the wage increase forces the employee into a higher tax bracket.
The higher tax has the effect of reducing real income.
It is, of course, not only wage and salary earners that are caught up in this interaction between extra money income and the tax scales.
Business people are just as much affected.
In broad terms, personal income tax indexation seeks to avoid these situations mainly by providing for income tax brackets in the rate scale to be adjusted in an appropriate way for inflation.
In the Bills I am presenting the income brackets in the tax scale are being adjusted by 13 per cent.
As already explained, this represents the increase in the average level of the Consumer Price Index for the year ended 31 March 1976 over its average level in the preceding year, as reduced by the effects of indirect taxes.
Other countries use the Consumer Price Index on a corresponding basis as the measure for tax indexation.
As a simple example of what is achieved by this form of indexation we can take a person who had a taxable income of $10,000 in 1975-76.
In this case the marginal rate of tax for 1975-76 is 35 cents in the dollar on the amount of income between $5,000 and $10,000.
If the same person had an income of $11,300 in 1976-77, that is, an increase of 13 per cent, the marginal rate on the extra $1,300 would, without indexation, be 45 cents in the dollar.
With indexation the rate on the extra $1,300 will stay at 35 cents thus reducing tax on it by $130.
Not only that, the taxpayer will make savings from indexation of the brackets lower down the scale.
That is what indexation is mainly about.
But, as I mention later, certain tax rebates are also being indexed upwards and this will mean further savings for many taxpayers.
Turning now to the technical provisions of this Bill, I should say firstly that the tax rebate to be allowed for the maintenance of a spouse, a daughter-housekeeper or a housekeeper is to be increased from $400 to $500 for 1976-77.
The sole parent rebate is to be increased from $200 to $350.
If these two rebates had only been indexed they would have become $452 and $226 respectively.
The Government believes, however, that in these two areas indexation alone would not have gone far enough, bearing in mind other changes which are being made, and has accordingly increased the rebates by considerably more than the indexation factor.
The rebate for an invalid relative is to be indexed so that it becomes $226 instead of $200.
Similarly, the rebate for a parent or parent-in-law will become $452 instead of $400.
The general rebate of $540 is to be indexed by 13 per cent and will thus become $610.
It is not proposed at this stage to index certain other tax allowances.
The most important of these are payments for life insurance or superannuation (present limit $1200), education expenses (present limit $250 per person) and rates on private dwellings (present limit $300).
We are not alone in limiting indexation in this marginal way.
For example, the Mathews Committee discloses at page 205 of its report that Canada restricts indexation to personal exemptions and the tax brackets.
The report states that in Canada standard medical and charitable deductions are not indexed, nor are deductions for employee expenses or contributions to pension and retirement funds.
The Government is committed to on-going indexation and the legislation provides accordingly.
Explicitly, it states that indexation for financial years following 1976-77 is to be based upon upward movements in the Consumer Price Index during the 12 months ending on 31 March of the previous year, excluding increases resulting from indirect taxes.
The precise indexation factor is to be determined on these guidelines by the Treasurer.
The indexation factor is to be applied in years beyond 1976-77 to all elements of the system that are being indexed for that year.
For this purpose it is proposed that the spouse and sole parent rebates, although actually substantially increased for 1976-77, are to be regarded as having been indexed.
I should mention specifically there is to be indexation of the element of the Zone A and Zone B allowances which is related to rebates for maintenance of dependants.
Although, as I shall refer to later, the Government's new proposals for better and fairer family allowances entails the withdrawal of tax rebates for children, this will not exclude them from the basis for calculation of the Zone allowances.
In effect, the dependants rebate element in the Zone allowance will be continued as if all the relevant rebates were still in existence and were being indexed at the 13 per cent rate.
Before I pass on from the indexation proposals I should mention two other matters, one affecting the separate net income provisions associated with dependants rebates and the other affecting provisional tax payable for 1976-77.
At present the maximum amount of separate net income a dependant may have without reducing the rebate allowable is $150.
This amount is to be increased to $170.
As regards provisional tax, it is to be borne in mind that it is payable for 1976-77 on income for 1975-76.
Provisional tax is the equivalent for self-employed people of PAYE deductions for employees.
The difference is that employees pay on current income while self-employed people pay on income lagged one year behind.
When, as is now proposed, there is a change in tax rates specifically attributable to general inflation of incomes there is, in the Government's view, a strong case for not applying the indexed rates in determining provisional tax when the incomes themselves are not indexed for that purpose.
This is so because the tax is being calculated on income of the previous year and it would involve a sort of "Double Counting" to apply the indexed rates scale in determining it.
For these reasons it has been decided that provisional tax for 1976-77 will be charged on 1975-76 incomes at 1975-76 rates.
Allowance will, however, be made for increased dependants rebates and Zone allowance, where they are relevant, and the child dependant allowances that are to be abolished will not be allowed.
I have spoken elsewhere of the Government's proposals for an improved scheme of family allowances and pointed out the reasons for the consequential removal of the rebates for maintenance of children from the income tax law.
The Bill effects this removal which, of course, will apply for the first time in assessments based on 1976-77 income.
It will not affect assessments for the current year, 1975-76.
The final matter dealt with by the Bill is associated with the Government's firm commitment to reduce Government expenditure. It deals with the taxation of certain social security payments.
In 1976-77 and subsequent income years it is proposed that particular social security benefits be included in assessable income and thus made subject to income tax.
Service pensions available to ex-servicemen and women between the ages of 60 and 65 and 55 and 60 respectively are to become taxable for 1976-77.
These pensions are the equivalent of age pensions which are already taxable.
In fact, service pensions are now exempt from tax while the recipient is under the qualifying age for an age pension.
As soon as that age is reached the pensions become taxable.
This is an anomalous situation which the Bill will eliminate.
Also to become taxable are widows pensions and supporting mothers benefits.
Widows pensions are, subject to a means test, paid at the same rates as age pensions.
As age pensions are taxable, it is anomalous for widows pensions to be outside the tax net.
The supporting mothers benefit is analogous to the widows pension and is to be treated in the same way for tax purposes.
Finally, unemployment and sickness benefits are to become taxable.
The present exemption from tax of this form of income gives rise to serious anomalies.
It is usually received for short periods and its exemption from tax can make a recipient of it better off than a person who has worked all the year round and received the same total income, not including any unemployment or sickness benefits.
The Government does not believe that this could possibly be viewed as a right result and proposes that it should no longer occur.
In conclusion I mention that the Government has deemed it prudent to proceed with indexation of the personal tax system at this time rather than await the outcome of a review of the system.
Our indexation of the present system is evidence of our strong commitment to indexation - which we regard as urgently necessary.
Technical aspects of the Bill are discussed in an explanatory memorandum being circulated to Honourable Members.
I commend the Bill to the House.