House of Representatives

Tax Laws Amendment (2012 Measures No. 6) Bill 2012

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5 - Rebate for medical expenses

Outline of chapter

5.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to better target the rebate for medical expenses by introducing an income test from 1 July 2012. The rebate for medical expenses is commonly referred to as the net medical expenses tax offset (NMETO).

5.2 For individuals who have an adjusted taxable income for rebates above the singles tier 1 threshold of $84,000 (indexed) for a single individual and the family tier 1 threshold for an individual who has a spouse or one or more dependants ($168,000 (indexed)), the threshold above which an individual can claim the NMETO for out-of-pocket medical expenses will be increased to $5,000 (indexed). The family threshold is increased by $1,500 for every dependent child after the first. In addition, for singles and families above their respective tier 1 threshold, the rate of NMETO will be reduced to 10 per cent for the amount of out-of-pocket expenses greater than $5,000.

5.3 Legislative references in this Chapter are to the ITAA 1936 unless otherwise stated.

Context of amendments

5.4 The NMETO provides taxpayers with a non-refundable tax offset for out-of-pocket medical expenses (that is, medical expenses less available reimbursements, such as those through the Medicare Benefits Schedule (MBS), the Pharmaceutical Benefits Scheme (PBS) and the Repatriation Pharmaceutical Benefit Scheme (RPBS) or Government aged care subsidies and private health insurance refunds) above the NMETO claim threshold.

5.5 The threshold of out-of-pocket expenses above which the NMETO can be claimed in 2012-13 is $2,120 (indexed to changes in the consumer price index (CPI)) with the offset available at a rate of 20 per cent of out-of-pocket medical expenses.

5.6 Eligible NMETO expenses are defined in subsection 159P(4) and broadly include expenses relating to an illness or operation which has been paid to a legally qualified doctor, nurse, chemist or hospital. Therapeutic expenses such as physiotherapy are eligible for the NMETO if prescribed by, and carried out under the direction of a doctor. The cost of medical aids and artificial limbs, artificial eye or hearing aids are also eligible expenses for the NMETO. Expenses incurred as a result of strictly cosmetic operations are ineligible for the NMETO.

5.7 There is no monetary limit to the total amount of offset a taxpayer can receive, but the amount of offset available is limited by the taxpayer's tax liability. That is, a taxpayer cannot receive a greater amount of offset than their basic income tax liability.

5.8 Where a taxpayer has paid eligible medical costs for themself or their Australian resident dependants, the taxpayer totals those expenses to reach the claim threshold.

5.9 In the 2012-13 Budget the Government announced it would better target expenditure on the NMETO by income testing the threshold above which a taxpayer may claim the offset and the rate at which the offset applies from 1 July 2012.

5.10 Australian Government annual health expenditure is expected to reach around $100 billion by 2022. Better targeting support through the NMETO is one of a number of measures the Government has identified to ensure a strong and sustainable health care system.

5.11 The Government is continuing to provide substantial support for health expenses, including around $27 billion in 2012-13 through the MBS the PBS and related safety nets.

Summary of new law

5.12 Schedule 5 applies an income test to eligibility for the NMETO and reduces the offset to 10 per cent where the taxpayer's adjusted taxable income for rebates exceeds the income test thresholds.

5.13 The income tests generally align with those for the Medicare levy surcharge. Broadly, the thresholds in 2012-13 are $84,000 for singles and $168,000 for families. Where the taxpayer has more than one dependent child the income threshold is increased by $1,500 for each dependent child after the first. These thresholds are indexed annually by average weekly ordinary time earnings (AWOTE).

5.14 Taxpayers who have an adjusted taxable income for rebates above the relevant threshold will be able to claim the NMETO at a rate of 10 per cent where their annual out-of-pocket expenses exceed $5,000 (indexed by CPI).

5.15 Those taxpayers who have an adjusted taxable income for rebates below the income test thresholds will continue to receive a rebate of 20 per cent of the amount of their out-of-pocket expenses where those expenses are greater than $2,120 in 2012-13 (indexed by CPI).

5.16 The main features of the impact of the income test on the rate of NMETO applied are presented in table 5.1.

Table 5.1 : Main features of the income test on the rate of NMETO
Status of taxpayer Adjusted taxable income for rebates Out-of-pocket medical expenses Rate of NMETO available (%)
Single $84,000 or less $2,120 or less 0
Greater than $2,120 20
Greater than $84,000 $5,000 or less 0
Greater than $5,000 10
Family1 $168,0002 or less $2,120 or less 0
Greater than $2,120 20
Greater than $168,0002 $5,000 or less 0
Greater than $5,000 10
1: A taxpayer is eligible for the family income threshold where they are married on the last day of the year or have dependants on any day of the year. Where a taxpayer is married (according to section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 ) the adjusted taxable income for rebates of the taxpayer and the person they are married to, are added together to calculate their income for income threshold purposes.

2: The income threshold is increased by $1,500 for each dependent child after the first.

Comparison of key features of new law and current law

New law Current law
A taxpayer can claim the NMETO for the total of the out-of-pocket expenses they incurred for themself and their dependants.

A new out-of-pocket expense threshold of $5,000 will be applied before some higher income earning taxpayers can claim the NMETO.

Taxpayers with an adjusted taxable income for rebates above $84,000 (indexed) for a single taxpayer and $168,000 (indexed) for a taxpayer who is married(according to section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 ) or has dependants will have the higher $5,000 threshold applied.

Where the taxpayer has more than one dependent child the threshold is increased by $1,500 for each dependent child after the first.

Where a taxpayer has adjusted taxable income for rebates above the relevant threshold a lower rebatable medical expense amount of 10 per cent applies for those expenses above the $5,000 threshold. The adjusted taxable income for rebates threshold is indexed by AWOTE.

The combined total of a taxpayer's out-of-pocket medical expenses must exceed $2,000 (medical expense rebate lower phase-in limit) (indexed by CPI from 2011-12) to be able to claim the NMETO. The threshold in 2012-13 is $2,120.

A taxpayer can claim the NMETO for the total of the out-of-pocket expenses they incurred for themself and their dependants.

Taxpayers at all taxable income levels can receive the NMETO at a rebatable medical expense amount of 20 per cent of their out-of-pocket medical expenses above the out-of-pocket expense threshold.

Detailed explanation of new law

5.17 The new law better targets the NMETO by providing for those with greater capacity to pay, that is those with income of greater than $84,000 or $168,000 if they are a family, to bear more of their out-of-pocket medical costs. The new law applies an income test, meaning that taxpayers who have an income greater than the income test will have a higher medical expense claim threshold and will receive a lower rate of NMETO. In doing this a number of new definitions are inserted into the law to refer to the income test, claim threshold and rebate amounts. The new law also provides for the application of the income test in specific situations such as trusts.

5.18 A new term, 'adjusted taxable income for rebates', is used to replace the existing adjusted taxable income which is used to define what is considered to be income for some rebates. The new term is created to avoid confusion with other definitions of adjusted taxable income, such as in the A New Tax System (Family Assistance) Act 1999 , that are different to the income test required for the NMETO income thresholds. [Schedule 5, item 1, subsection 6(1)]

5.19 The terms 'singles tier 1 threshold' ($84,000 in 2012-13) and 'family tier 1 threshold' ($168,000 in 2012-13) are inserted in the ITAA 1936. These terms define the income threshold at which a higher amount of out-of pocket medical expenses ($5,000 in 2012-13) is required before the NMETO is applied to singles and families respectively. These terms are the same as those used in the Private Health Insurance Act 2007 and A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 . Using these terms reduces taxpayer confusion as they provide consistency in the terminology used for the NMETO income thresholds with those used for the Medicare levy surcharge. [Schedule 5, items 1and 6, subsection 6(1)]

5.20 The terms 'medical expense rebate higher phase-in limit' ($5,000 in 2012-13) and 'medical expense rebate lower phase-in limit' ($2,120 in 2012-13) are inserted that define the amount of out-of pocket medical expenses the taxpayer is required to have before being able to have the NMETO applied. The different amounts at which the NMETO is applied further ensures for those with greater capacity to pay to bear more of their out-of-pocket medical costs. [Schedule 5, items 3 and 4, subsection 6(1)]

5.21 Finally, the new term 'rebatable medical expense amount' is inserted into the law. The rebatable medical expense amount is the rate at which NMETO is applied. For those taxpayer who have an income greater than the income test and they have out-of-pocket medical expenses above the medical expense rebate higher phase-in limit ($5,000) a rate of NMETO applied is 10 per cent. If the taxpayer has income equal to or less than their relevant tier threshold, and has out-of-pocket medical expenses above the medical expense rebate lower phase-in limit ($2,120), the rate of NMETO applied is 20 per cent. [Schedule 5, items 5, subsection 6(1)]

5.22 The existing definition of indexable amount at subsection 159HA(7) is repealed and substituted with a new definition of indexable amount. The new definition provides a clearer presentation of existing indexable amounts and includes the indexable amounts relating to the NMETO income test. This is done by inserting a table into subsection 159HA(7) which sets out the indexable amounts and the first indexable year of the amount. [Schedule 5, item 9, subsection 159HA(7)]

5.23 The new indexable amounts which relate to the new income test for the NMETO - the medical expense rebate higher phase-in limit and the medical expense rebate lower phase-in limit - are included as indexable amounts. [Schedule 5, item 9, subsection 159HA(7), items 4 and 5 in the table]

5.24 The medical expense rebate higher phase-in limit is increased each year through CPI indexation from its first year of effect, that is in the 2013-14 year of income. [Schedule 5, item 9, subsection 159HA(7), item 4 in the table]

5.25 The medical expense rebate lower phase-in limit is increased each year through CPI indexation from its first year of effect, that is in the 2011-12 year of income and has resulted in the medical expense rebate lower phase-in limit being $2,120 in 2012-13. [Schedule 5, item 9, subsection 159HA(7), item 5 in the table]

5.26 The term 'adjusted taxable income' is omitted and substituted with 'adjusted taxable income for rebates' in paragraph 159J(1AB)(a), subsection 159J(1AC) including in the formula and note contained within the subsection, and subsections 159J(4) and (5). This change has been made to clarify that the measure of adjusted taxable income for the purposes of section 159J, which deals with rebates for dependants, and section 159Q is different to the measure 'adjusted taxable income' defined in Schedule 3 the A New Tax System (Family Assistance) Act 1999 and used elsewhere in the tax law. [Schedule 5, items 10 to 13, paragraph 159J(1AB)(a), subsections159J(1AC), 159J(4) and (5)]

5.27 Adjusted taxable income for rebates differs from adjusted taxable income in Schedule 3 of the A New Tax System (Family Assistance) Act 1999 in that adjusted taxable income for rebates excludes those elements of the adjusted taxable income definition which involves a taxpayer's spouse's income or how a spouse is treated under special circumstances.

5.28 The medical expense rebate higher phase-in limit ($5,000) applies when a principal individual (a taxpayer) has an adjusted taxable income for rebates that exceeds their relevant tier 1 threshold ($84,000 for a single and $168,000 for a family). [Schedule 5, item 20, subsection 159Q(1)]

5.29 A taxpayer is eligible for the $168,000 family tier 1 threshold, where they are married, that is they are in a relationship as a couple on a genuine domestic basis with a person of the same or different sex, on the last day of the income year or has dependants on any day of the year. [Schedule 5, item 20, subsection 159Q(1), item 1 in the table]

5.30 To qualify as a family for the family tier 1 threshold, a taxpayer must be married on the last day of the income year or have a dependant on any day of the income year.

5.31 The new law uses the term 'married' to provide consistency in the new provisions with those for the Medicare levy surcharge. As the new law applies the income threshold features of the Medicare levy surcharge, it also needs to adopt a number of the elements used in the Medicare levy surcharge provisions. The Medicare levy surcharge is applied taking into account the taxpayer's relationship and dependants. The provisions applying the Medicare levy surcharge thresholds to the NMETO therefore adopt the definition of married.

5.32 The law providing for the Medicare levy surcharge considers people to be married where two people of the same sex or different sex are in a relationship as a couple on a genuine domestic basis. A person will also be considered to be married where they are in a relationship that is registered for the period under a law of a State or Territory prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section. Section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 sets out what is considered to be the meaning of married.

5.33 A taxpayer is also eligible for the family tier 1 threshold, where he or she has dependants on any day of the year and is not married (that is, is not in a genuine domestic relationship with a partner of the same or different sex) on the last day of the income year. [Schedule 5, item 20, subsection 159Q(1), item 2 in the table]

5.34 The medical expense rebate lower phase-in limit applies if the taxpayer's adjusted taxable income for rebates is less than the family tier 1 threshold. The medical expense rebate lower phase-in limit is $2,120 in 2012-13 and has increased over time from $2,000 due to its annual indexation according to section 159HA. The same indexation will be applied to the medical expense rebate higher phase-in limit. [Schedule 5, item 20, subsection 159Q(5), section 159HA(7)]

5.35 Where two people are married (according to section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 ) on the last day of the year of income the adjusted taxable income for rebates of the taxpayer and the person they are considered to be married to, are added together to calculate the taxpayer's adjusted taxable income for rebates. [Schedule 5, item 20, subsection 159Q(1) item 1 in the table]

5.36 The amendments in the Schedule also ensure that the income test is applied appropriately where medical expense are paid by a trustee on behalf of an individual who is under a legal disability.

5.37 In the situation where a trust estate operates and the beneficiary of the trust estate is under a legal disability such that the trustee is liable to be assessed on income to which a beneficiary is presently entitled (as described in paragraph 159P(3)(a)), the income to which the beneficiary is presently entitled for the year of income is used to determine if the medical expense rebate higher phase-in limit applies. This occurs in the same way adjusted taxable income for rebates is used for non-trust situations. [Schedule 5, item 20, subparagraph 159Q(1)(a)(ii), subsection 159Q(4) and paragraph 159P(3)(a)]

5.38 The relevant tier 1 threshold that applies to income to which a beneficiary is presently entitled is determined by whether the beneficiary of the trust estate is considered to be married on the last day of the year of income or whether the beneficiary has dependants on any day during the year of income. If the beneficiary is considered to be married on the last day of the year, or has one or more dependants on any day of the year, the family tier 1 threshold applies. [Schedule 5, item 20, subparagraph 159Q(1)(a)(ii)]

5.39 As part of ensuring higher income earners bear more of their out-of-pocket medical costs, those income earners with a greater capacity to pay have a lower rate of NMETO applied and require a higher amount of out-of-pocket medical expenses before they have NMETO applied. The tier 1 thresholds and the phase-in limits operate in conjunction to determine the amount of NMETO available. [Schedule 5, item 20, subsection 159Q(1)]

5.40 When the taxpayer is eligible for the family tier 1 threshold, and has an adjusted taxable income for rebates greater than the family tier 1 threshold the taxpayer must have out-of-pocket expenses of greater than the medical expense rebate higher phase-in limit (that is $5,000 in 2012-13) before any NMETO is available. [Schedule 5, item 20, subsection 159Q(1), items 1 and 2 in the table]

5.41 The NMETO available is 10 per cent of the taxpayer's out-of-pocket expenses greater than the medical expense rebate higher phase-in limit. [Schedule 5, item 17, paragraph 159P(3AA)(a)]

5.42 When the taxpayer is eligible for the family tier 1 threshold, and has an adjusted taxable income for rebates equal to or less than the family tier 1 threshold, the taxpayer must have out-of-pocket expenses of greater than the medical expense rebate lower phase-in limit (that is $2,120 in 2012-13) before any NMETO is available. [Schedule 5, item 20, subsection 159Q(1), items 1 and 2 in the table]

5.43 The NMETO available in this circumstance is 20 per cent of the taxpayer's out-of-pocket expenses greater than the medical expense rebate lower phase-in limit. [Schedule 5, item 17, paragraph 159P(3AA)(b)]

Example 5.16 Will and Sofia met during the income year and become a couple living together for three months, including the last day of the income year. Because Will and Sofia would be considered to be married on the last day of the year, the family tier 1 threshold of $168,000 in 2012-13 applies.The amount of Will and Sofia's adjusted taxable income for rebates for the income year is determined by adding together their respective adjusted taxable income for rebates of the year they were each other's spouse. Will's individual adjusted taxable income for rebates for the full income year is $89,900 and Sofia's is $61,960. This amount is combined to be an adjusted taxable income for rebates of $151,860 for the income year.Because this amount is below the family tier 1 threshold, the rate of NMETO available is 20 per cent of the out-of-pocket expenses above the medical expense rebate lower phase-in limit (that is $2,120 in 2012-13).Will has incurred a number of medical expenses during the income year for Sofia and himself. After reimbursements from Medicare and his health care insurer, Will has out-of-pocket expenses of $3,750.The amount of NMETO Will is eligible for is 20 per cent of $1,630, that is $326.

Example 5.17 Nic and Tony separate during the year and the care and maintenance for their child, Sam, is shared between them such that Sam would be considered a dependant of both Nic and Tony in accordance with item 2 in column 1 of the table in subsection 159Q(1).Nic and Tony both incur medical expenses for Sam.While neither Nic nor Tony have a spouse on the last day of the year, the fact that Sam is considered a dependant of both Nic and Tony enables both Nic and Tony to be eligible for the family tier 1 threshold.Nic has an adjusted taxable income for rebates of $185,000 and Tony has an adjusted taxable income for rebates of $140,000.Nic has out-of-pocket medical expenses for herself and Sam of $4,500. Tony has out-of-pocket medical expenses for himself and Sam of $3,000.Because Nic has an adjusted taxable income for rebates greater than the family tier 1 threshold she needs out-of-pocket expenses greater than $5,000 to be eligible for the NMETO. Nic is therefore ineligible for any NMETO.Tony is eligible for some NMETO as his adjusted taxable income for rebates is less than the family tier 1 threshold and he only needs to have eligible medical expenses greater than the medical expense rebate lower phase-in limit (that is $2,120). Tony is eligible for $176 of NMETO.

5.44 Where a taxpayer is not married (according to section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 ) on the last day of the year and has no dependants on all days of the year, the singles tier 1 threshold applies [Schedule 5, item 20, subsection 159Q(1), item 3 in the table] .The singles tier 1 threshold is an adjusted taxable income for rebates of $84,000 in 2012-13.

5.45 The medical expense rebate lower and higher phase-in limits operate in the same way where the taxpayer is not married or has no dependants as they operate where the taxpayer is married or has dependants.

5.46 When a single taxpayer has an adjusted taxable income for rebates greater than the singles tier 1 threshold the taxpayer must have out-of-pocket expenses greater than the medical expense rebate higher phase-in limit before any NMETO is available.

5.47 When a single taxpayer has an adjusted taxable income for rebates less than or equal to the singles tier 1 threshold the taxpayer must have out-of-pocket expenses greater than the medical expense rebate lower phase-in limit before any NMETO is available.

5.48 The family tier 1 threshold and the singles tier 1 threshold are the income thresholds used for the Medicare levy surcharge. To ensure that the same people are considered to be a couple or a family for eligibility for the family tier 1 threshold as those for the Medicare levy surcharge income thresholds a person is considered to be married to another person where they are in a genuine domestic relationship with someone of the same or different sex. [Schedule 5, item 20, subsection 159Q(1), table]

5.49 A person is considered to be the dependant of another person for the purposes of determining whether the other person qualifies for the family tier 1 threshold in the same way as a person is considered to be a dependant under section 5 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 . However, for the purposes of section 159Q a person is considered to not be a dependant of the other person if the two people are married to each other. [Schedule 5, item 20, subsection 159Q(3)]

5.50 This is because a taxpayer qualifies to have the family tier 1 threshold applied where they are married on the last day of the income year or by having a dependant on any day of the income year. To allow the person to whom they are married to be a dependant could result in the taxpayer qualifying for the family tier 1 threshold on the basis that they were married to the person during the year when they were not married on the last day of the year.

5.51 A person to whom the taxpayer is married cannot be a dependant for the purposes of the income test. If the taxpayer has no other dependants they must be married on the last day of the income year to qualify for a family threshold. [Schedule 5, item 20, subsection 159Q(3)]

5.52 Where a person dies, the last day they are alive is taken to be the last day of the income year of which they were alive. [Schedule 5, item 20, subsection 159Q(2)]

Application and transitional provisions

5.53 These amendments apply on or after1 July 2012 for the 2012-13 and later income years. [Schedule 5, item 21]

Consequential amendments

5.54 A number of consequential amendments are required to ensure consistent wording in sections 159HA and 159P due to the new definitions inserted in subsection 6(1). Other amendments have been made to update headings or references to take account of new terminology. [Schedule 5, items 7 and 8, 14 to 16, 18 and 19, subsection 6(1), sections 159HA and 159P]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Rebate for medical expenses

5.55 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

5.56 This Schedule amends the Income Tax Assessment Act 1936 to introduce an income test to the rebate for medical expenses from 1 July 2012. The rebate for medical expenses is commonly referred to as the net medical expenses tax offset (NMETO).

5.57 The NMETO provides taxpayers with a non-refundable tax offset for out-of-pocket medical expenses (that is medical expenses less available reimbursements, such as those through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme and the Repatriation Pharmaceutical Benefit Scheme or Government aged care subsidies and private health insurance refunds) above the NMETO claim threshold.

5.58 The threshold of out-of-pocket expenses above which the NMETO can be claimed in 2012-13 is $2,120 (indexed to changes in the consumer price index) with the offset available at a rate of 20 per cent of out-of-pocket medical expenses.

5.59 This Schedule applies a higher claim threshold ($5,000 indexed) where the taxpayer has an adjusted taxable income for rebates of $84,000 (indexed) for a single taxpayer and $168,000 (indexed) for a taxpayer who has a spouse or has dependants. In addition, the rate of NMETO is reduced to 10 per cent for the amount of out-of-pocket expenses greater than $5,000.

Human rights implications

5.60 This Schedule engages the following human rights: Right to Health

5.61 Article 12(1) of the International Covenant on Economic Social and Cultural Rights (ICESCR) recognises the right to the enjoyment of the highest attainable standard of physical and mental health.

5.62 While ICESCR contains no definition of health, the UN Committee on Economic Social and Cultural Rights has stated that the right to health is not to be understood as a right to be healthy.

5.63 The income test applied to the net medical expenses tax offset does not reduce the availability or access to comprehensive medical services in Australia.

5.64 The application of the income test reduces the Government rebate for the out-of-pocket cost of medical expenses for higher income earners who are considered to have a greater capacity to pay than those on lower incomes.

5.65 Australian Government annual health expenditure is expected to reach around $100 billion by 2022. Better targeting support for out-of-pocket medical expenses through the NMETO is one of a number of measures the Government has identified to ensure a strong and sustainable health care system.

5.66 The Government is continuing to provide substantial support for health expenses, including around $27 billion in 2012-13 through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme and related safety nets.

Conclusion

5.67 This Schedule is compatible with human rights because it advances the protection of human rights in relation to health by ensuring a sustainable health care system and, to the extent that it may also limit access to support for certain individuals, those limitations are reasonable, necessary and proportionate.

Assistant Treasurer, the Hon David Bradbury


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