House of Representatives

Explanatory Memorandum

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

Chapter 1 - Low income rebates

Outline of chapter

1.1 Schedule 1 to this Bill will amend the Income Tax Assessment Act 1936 (ITAA 1936) to identify which persons qualify for a rebate under section 160AAAA and which persons qualify for a rebate under section 160AAA.

Context of reform

1.2 The amendments will enable regulations to be made to ensure that senior Australians and certain pensioners do not pay income tax or the Medicare levy until their taxable incomes exceed the higher new nil income tax liability thresholds.

Summary of new law

1.3 The rebates for low income aged persons, and those persons who are defined as being of age pension age in either the Social Security Act 1991 or the Veterans Entitlements Act 1986 and are receiving a pension under either of those Acts (senior Australians), will be available under section 160AAAA of the ITAA 1936.

1.4 Similarly, where a beneficiary of a trust is of age pension age and receiving an age pension, the rebate will be available to trustees in the trustees assessment under section 160AAAB of the ITAA 1936.

1.5 The rebates for those persons who are under age pension age and recipients of other Australian government payments which are defined as rebatable pensions will be available under section 160AAA.

1.6 The calculation of the rebate for those senior Australians who are eligible for a low income aged persons rebate under section 160AAAA of the ITAA 1936 are outlined in Regulation 150AD. Eligibility for the rebate will be contained in Regulation 150AB.

1.7 The calculation of the rebate for those persons who are under age pension age and eligible for a pensioner rebate under section 160AAA of the ITAA 1936 are outlined in Regulation 151.

1.8 The proposed nil income tax liability thresholds for the 2000-2001 year of income and subsequent years are outlined in Table 1.1.

Comparison of key features of new law and current law

Detailed explanation of new law

1.9 This Bill replaces the existing subsection 160AAAA(2) to state that to qualify for a tax rebate, persons who are defined as pension age under the Veterans Entitlements Act 1986 and receive a pension under that Act, will now be eligible for the rebate under section 160AAAA. [Schedule 1, item 1, subsection 160AAAA(3)]

1.10 This Bill provides that the levels of taxable income where a person qualifies for a rebate under subsection 160AAAA(2) will be specified in the regulations [Schedule 1, item 2] . The amendments mean that age pension age recipients of pensions under either the Social Security Act 1991 or the Veterans Entitlements Act 1986 will now be eligible for a rebate under section 160AAAA rather than section 160AAA. This amendment will mean that all low income aged persons, whether they be pensioners or self-funded retirees, will be covered by the one rebate.

1.11 The reference in subsection 160AAAA(4) to subsection 160AAAA(3) instead of paragraph 160AAAA(3)(a) is merely a technical amendment. As a result of the amendment to subsection160AAAA(3), paragraph 160AAA3(a) has now been repealed. [Schedule 1, item 3]

1.12 Subsection 160AAAB(2) is amended to insert a new condition to ensure that where a beneficiary is in receipt of a pension, allowance or benefit under the Veterans Entitlements Act 1986 (other than Part VII), and has reached pension age within the meaning of that Act, the trustee will be entitled to the rebate. A trustee will qualify for rebate under section 160AAAB in the trustees assessment in respect of the beneficiarys share of the net income of the trust. This ensures that trustees in respect of beneficiaries who are in receipt of a service pension, and are of age pension age, are entitled to the same rebate as trustees of a beneficiary who is a low income aged person or is a person who is a pension age recipient of a pension under the Social Security Act 1991. [Schedule 1, item 4]

1.13 The amendments also provide that the levels of taxable income where a trustee qualifies for a rebate under section 160AAAB will be specified in the regulations. [Schedule 1, item 5]

1.14 The reference to paragraph 160AAAB(3)(a) in subsections 160AAAB(4) and (5) is deleted because the paragraph has been repealed. [Schedule 1, items 6 and 7]

1.15 This Bill also inserts a new subsection 160AAA(4A) to state that where taxpayers are entitled to a rebate under both sections 160AAA and 160AAAA, the taxpayer will be entitled to a higher rebate under section 160AAAA. The same applies for a beneficiary of a trust where the trustee is entitled to a rebate under both sections 160AAAA and 160AAAB in respect of the taxpayer. [Schedule 1, item 10]

1.16 As a result of new subsection 160AAA(4A), the references in subsections 160AAA(2) to (4) are amended to include the reference to subsection 160AAA(4A). These are minor technical amendments. [Schedule 1, items 8 and 9]

1.17 The Government will amend the regulations so that the taxpayers rebate amount is increased by $1,037 for single aged pensioners and low income aged persons who are treated as single. For aged pensioners receiving an illness-separated-rate pension and low income aged persons treated as separated due to illness, the rebate amount is increased by $751. For aged pensioners receiving a partnered-rate pension and low income aged persons treated as partnered couples, the regulations are being amended to increase the taxpayers rebate amount by $900. The different rebate amounts for the partnered-rate pension and the illness-separated-rate pension is due to differing pension levels.

1.18 The amendments to the regulations will mean that pensioners of age pension age and self-funded retirees will now be able to earn significantly more income before paying income tax as a result of the increased rebates. In particular, single, partnered and illness-separated aged pensioners and low income aged persons will have a nil income tax liability threshold of $20,000, $16,306 and $18,882 respectively. Table 1.1 sets out the current and the proposed nil income tax liability thresholds.

1.19 The rebates will phase out at the following levels:

•

single - $37,840;

•

illness-separated couples - $35,202; and

•

married - $29,122.

After these amounts no rebate will be available.

1.20 The Government will amend the income tax regulations as soon as practicable following this Bill receiving Royal Assent.

Note:

(A)

Figures do not incorporate the low income rebate.

(B)

Figures incorporate the low income rebate.

Application and transitional provisions

1.21 The amendment specifies that the amendments made by this Schedule, will apply to the 2000-2001 year of income and all later years of income. [Schedule 1, item 11]

1.22 This amendment provides that regulations previously made under subsections 160AAAA(3) and 160AAAB(3), which are in force before these amendments, are taken to have been made under those sections as amended by this Bill. [Schedule 1, item 12]