Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Amendments to the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 and the Medicare Levy Act 1986
Overview
3.1 The A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Amendment Bill 2000 amends the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999 (ANTS (MLS-FB) 1999) to make minor technical corrections to the Medicare levy surcharge rules. Schedule 3 to the A New Tax System (Fringe Benefits) Bill 2000 makes a technical amendment to the Medicare levy surcharge provisions contained in the Medicare Levy Act 1986 (MLA 1986).
Summary of the amendments
3.2 The purpose of the amendments is to correct anomalies in the application of the Medicare levy surcharge to a person's taxable income and reportable fringe benefits.
3.3 The amendments to the ANTS (MLS-FB) 1999 and MLA 1986 will ensure that:
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- a person will be liable for the Medicare levy surcharge when the sum of his or her taxable income and reportable fringe benefits total exceeds the income threshold that applies to the person for the year of income;
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- the income tests used to determine whether the surcharge is payable by a person who is married for the whole year are consistent; and
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- where a person has not been married for the whole year of income, no surcharge is payable unless his or her total taxable income and reportable fringe benefits total exceeds the family surcharge threshold.
3.4 The amendments apply to the Medicare levy surcharge payable on a person's taxable income and reportable fringe benefits for the 1999-2000 year of income and later years of income.
Background to the legislation
3.5 The ANTS (MLS-FB) 1999 imposes a 1% Medicare levy surcharge on a person's reportable fringe benefits total for a year of income, where the person is a resident of Australia at any time during the year. The income tests used to determine whether a person is liable for the surcharge are based on the sum of the person's and their spouse's taxable income and reportable fringe benefits for the year. Persons can avoid liability for the surcharge by taking out private patient hospital insurance.
3.6 The MLA 1986 imposes an additional 1% Medicare levy on a person's taxable income, where a person's taxable income and reportable fringe benefits for a year of income exceed the thresholds set out in the law.
Explanation of the amendments
General rules for calculating the amount of surcharge payable
3.7 Section 11 of the ANTS (MLS-FB) 1999 contains the general rules for calculating the amount of surcharge payable on reportable fringe benefits. Currently, subsections 11(2) and (3) provide that no surcharge is payable by a person if his or her taxable income is less than the Medicare levy low income threshold of $13,389. Similarly, the surcharge amount is reduced where the person's taxable income is between the amounts of $13,389 and $14,474. This threshold is not affected by the reportable fringe benefits total.
3.8 Subsections 11(2) and (3) are repealed to correct the inconsistency between the ANTS (MLS-FB) 1999 and the MLA 1986. A person will be liable for the surcharge where the sum of the person's taxable income and reportable fringe benefits total exceeds the relevant income tests. The income tests used will depend on whichever of the Divisions of ANTS (MLS-FB) 1999 applies to the person for a period in the year of income. The amendment ensures that a person can not avoid liability for the surcharge, or reduce the amount of surcharge payable, through salary packaging.
Calculation of full year surcharge for married person
3.9 Division 4 of the ANTS (MLS-FB) 1999 is used to calculate the amount of surcharge payable by a person who:
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- is married for the year of income;
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- is not a prescribed person; and
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- either the person or any one of his or her dependants are not covered by private patient hospital insurance.
3.10 The income tests used in determining liability for the surcharge differ, depending on whether these conditions apply for the whole year of income or for only part of the year.
3.11 When the conditions apply for the whole year of income, the taxable income and reportable fringe benefits total of the person's spouse are included in the income test calculations. New subsection 15(2) provides a special rule for calculating the spouse's taxable income when the spouse is a beneficiary of a trust estate. In this case, the spouse's taxable income must also include the spouse's share in the net income of that trust estate to which they are presently entitled, and on which the trustee is assessed under section 98 of the Income Tax Assessment Act 1936 .
3.12 New subsection 15(2) is equivalent to the special rule which already exists under subsection 16(5). Where Division 4 only applies for part of the year of income to a person who is married for the whole year (e.g. the person and dependants have private patient hospital insurance for part of the year), subsection 16(5) requires the spouse's share of net trust income which is assessable to the trustee, to be taken into account when calculating his or her taxable income under subsection 16(2). The amendment therefore ensures that the calculation of a spouse's taxable income is consistent when Division 4 applies for the whole year of income or for only part of the year of income.
3.13 Item 4 amends subsection 16(5) to enhance the readability of the provision and to reflect the wording used in new subsection 15(2) .
Calculation of part year surcharge for married person
3.14 Item 3 of the ANTS (MLS-FB) 1999 and Schedule 3 of the A New Tax System (Fringe Benefits) Bill 2000 correct the income tests used in determining whether a person is liable for the surcharge when he or she is married for part of the year of the income. The amendment to paragraph 16(3)(b) of the ANTS (MLS-FB) 1999 will ensure that no surcharge is payable on a person's reportable fringe benefits if the sum of the person's taxable income and reportable fringe benefits total for the year of income is less than, or equal to, the family surcharge threshold . Similarly, paragraph 8D(4)(b) of the MLA 1986 is amended so that the family surcharge threshold is the income test used in determining whether a person is liable for the additional medical levy payable on taxable income.