House of Representatives

Explanatory Memorandum

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

Chapter 4 - Medical expenses offset - exclusion of solely cosmetic procedures

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to exclude solely cosmetic procedures from the medical expenses offset (MEO).

Context of amendments

4.2 In the 2005-06 Budget the Government announced that it would amend the ITAA 1936 to exclude solely cosmetic procedures from the MEO with effect from the 2005-06 income year.

4.3 Under section 159P of the ITAA 1936, a tax offset is available at the rate of 20 per cent of any net medical expenses exceeding $1,500 in an income year.

4.4 To qualify for the offset, the medical expenses must be paid by a resident taxpayer, in respect of himself/herself or a resident dependant.

4.5 Medical expenses do not qualify for the offset to the extent that they are reimbursed, or are eligible to be reimbursed.

4.6 Prior to this amendment the definition of eligible medical expenses was widely defined, thereby enabling taxpayers to claim an offset in respect of procedures that were solely cosmetic.

4.7 This amendment ensures that expenses relating to procedures that are, or are considered to be, solely cosmetic are ineligible medical expenses and therefore not claimable under the MEO.

4.8 This amendment only applies to procedures that are cosmetic in nature and are subsequently identified to be solely cosmetic (as provided by the legislation). Procedures that are not solely cosmetic are not affected by this amendment.

4.9 In this chapter the term 'operation' is used interchangeably with 'procedure'.

Summary of new law

4.10 This amendment, dealing with 'ineligible medical expenses', specifically excludes the following types of payments from the MEO:

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payments to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of a cosmetic operation that is not a professional service for which a Medicare benefit is payable under Part II of the Health Insurance Act 1973 ; or

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payments to a legally qualified dentist for dental services, or treatment, that is solely cosmetic.

[Schedule 4, item 2, subsection 159P(4), paragraphs (a) and (b) definition of 'ineligible medical expenses']

4.11 Schedule 4 to this Bill also makes a minor amendment to subsection 159P(1) of the ITAA 1936.

Comparison of key features of new law and current law

Detailed explanation of new law

4.12 Schedule 4 to this Bill excludes solely cosmetic procedures from the MEO. [Schedule 4, item 2, subsection 159P(4) definition of 'ineligible medical expenses']

4.13 This will mean that solely cosmetic procedures will no longer be considered eligible expenses under the MEO.

4.14 The term 'medical expenses' was widely defined for the purpose of the MEO to cover payments to doctors, nurses, chemists, dentists, opticians and optometrists. Prior to this amendment the definition of eligible medical expenses enabled taxpayers to claim an offset in respect of procedures that were solely cosmetic.

4.15 This amendment therefore restricts access to the MEO in respect of solely cosmetic procedures.

4.16 Specifically, this amendment restricts access for solely cosmetic procedures expenses under two broad categories: general medical expenses; and general dental expenses.

General medical expenses

4.17 Expenses which are cosmetic in nature and do not attract a Medicare benefit are considered 'ineligible medical expenses' and are excluded from the MEO. [Schedule 4, item 2, subsection 159P(4), paragraph (a) definition of 'ineligible medical expenses']

4.18 In determining whether a procedure is cosmetic in nature, the ordinary definition of 'cosmetic' applies.

4.19 The Macquarie dictionary defines cosmetic as:

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'serving to beautify; imparting or improving beauty, especially of the complexion'; or

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'designed to effect a superficial alteration while keeping the basis unchanged'.

4.20 Where a procedure has been identified to be cosmetic (by the ordinary definition) the legislation imposes a link to the payment of Medicare benefits under Part II of the Health Insurance Act 1973 to distinguish whether a procedure is solely cosmetic.

4.21 The link to the payment of Medicare benefits effectively deems a cosmetic procedure to be solely cosmetic where no Medicare benefit is payable in respect of that procedure. Alternatively, if that same procedure does have a Medicare benefit payable, it will not be considered to be solely cosmetic and therefore will continue to be an eligible expense in respect of the MEO.

4.22 It is important to note that this link to Medicare benefits does not relate to all procedures under the MEO. The link is only relevant in relation to certain cosmetic procedures (see paragraph 4.16).

Example 4.1

In 2005 Glen had several courses of botox injections at a net cost of $2,000 to remove wrinkle lines from his forehead.

As this procedure is cosmetic in nature by the ordinary definition, to determine whether Glen is eligible to claim the MEO, Glen needs to establish whether this procedure attracts a Medicare benefit. Glen could do this by asking his doctor, speaking to Medicare, or consulting the Medicare Benefits Schedule (this would generally be clear where no Medicare benefit is received by the taxpayer).

As botox injections to remove wrinkle lines do not attract a Medicare benefit, this procedure is therefore deemed to be solely cosmetic and is subsequently an ineligible medical expense for the purposes of the MEO.

Example 4.2

Nicole had rhinoplasty in August 2005 to remove a bump in her nose. For this procedure Nicole incurred a net cost of $8,600.

By the ordinary definition, this procedure is cosmetic in nature and it does not attract any Medicare benefits. Therefore, this procedure is an ineligible medical expense for the purposes of the MEO.

Alternatively, if Nicole had a similar procedure carried out to correct a breathing difficulty, while this might still be a cosmetic procedure by the ordinary definition, it would be an eligible medical expense as a Medicare benefit would be payable.

Example 4.3

Sue underwent laser vision correction surgery on both eyes at a net cost of $4,000. The issue of whether laser eye surgery is cosmetic by the ordinary definition (using the Macquarie Dictionary) was considered in the Australian Taxation Office's Interpretive Decision - GST and laser vision correction surgery (ATO ID 2004/51 available on www.ato.gov.au).

In this Interpretive Decision it was considered that laser eye surgery is not cosmetic by the ordinary definition for the purposes of the GST legalisation. Specifically the Interpretive Decision states that "Laser eye surgery performed to correct a patient's vision, changes the function, but not the appearance of the eye. - Therefore, the medical service is performed for medical reasons, not for cosmetic reasons -".

On this basis, laser vision correction surgery is not considered cosmetic and is therefore not affected by this amendment. That is, the procedure continues to attract the MEO.

Example 4.4

Lucy underwent reconstructive surgery following earlier surgery to remove breast cancer. As a Medicare benefit is payable, the cost of reconstructive surgery is an eligible expense in respect of the MEO.

General dental expenses

4.23 Expenses paid to a legally qualified dentist for dental services, or treatments that are solely cosmetic are excluded from the MEO. [Schedule 4, item 2, subsection 159P(4), paragraph (b) definition of 'ineligible medical expenses']

4.24 As dental expenses generally do not attract Medicare benefits the legislation does not establish a link to Medicare benefits. Instead, to determine whether a procedure is solely cosmetic the ordinary definition of 'cosmetic' applies (see paragraph 4.19). Similarly, in conjunction with the ordinary definition of 'cosmetic' the ordinary definition of 'solely' also applies to define a solely cosmetic procedure.

Example 4.5

Amanda had braces fitted at a net cost of $5,000. As braces are fitted for many reasons that are not solely cosmetic, such as to fix the problem of crowed teeth, missing teeth, misaligned jaws or bites, braces are not considered to be solely cosmetic. Therefore, braces continue to be an eligible expense and Amanda is able to claim the MEO.

Example 4.6

Kris had three courses of teeth bleaching at a cost of $1,200 to remove extrinsic staining (eg, coffee staining). Kris had naturally white teeth with no intrinsic or extrinsic staining and had teeth bleaching for the sole purpose of making his teeth whiter. By the ordinary definition of solely and cosmetic, this procedure is solely cosmetic and therefore is an ineligible medical expense in respect of the MEO.

Example 4.7

James had a jewel inserted in his tooth by his dentist. As this procedure is solely cosmetic it is an ineligible medical expense for the purpose of the MEO.

Application and transitional provisions

4.25 The amendments made by Schedule 4 to this Bill apply to assessments for income years commencing on or after 1 July 2005 as announced in the 2005-06 Budget. As this offset is claimable on assessment, taxpayers will not be adversely affected by the date of commencement.