Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)Chapter 8 Dependency tax offsets
Outline of chapter
16.1 Part 5 of Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to replace all current income definitions used to determine eligibility for the dependency tax offsets with 'adjusted taxable income'. 'Adjusted taxable income' is the income definition used to determine eligibility for family assistance payment purposes.
16.2 Part 5 also extends the income cap on eligibility for the dependency tax offsets, introduced as part of the 2008-09 Budget, so that it applies to the combined adjusted taxable income of the taxpayer and their spouse (where appropriate). The exception is the income cap on eligibility for the dependent spouse tax offset which will continue to apply to the taxpayer's income only.
Context of amendments
16.3 The dependency tax offsets are available to taxpayers that maintain a dependant during an income year. To qualify for the offsets, a taxpayer and their dependant must have income below particular thresholds. For example, the dependant must have 'separate net income' below $282 if the taxpayer is to qualify for the maximum offset.
16.4 'Separate net income' is broadly defined as gross income that the dependant earned or received while being maintained by the taxpayer less expenses that are regarded, according to ordinary accountancy and commercial principles, as a direct charge against that income. Separate net income includes some exempt income that would not ordinarily be included in the taxpayer's assessable income such as disability support pensions.
16.5 Where a dependant's separate net income is above $282 then the maximum offset available to the taxpayer will reduce by $1 for every $4 by which the dependant's separate net income exceeds $282. The formula to calculate the offset in these circumstances is as follows:
Tax offset available = maximum tax offset - (separate net income - 282)/4
16.6 From 1 July 2008, taxpayers must have taxable income of $150,000 or less to be eligible for the dependency tax offsets. This change was introduced as part of the Families, Housing, Community Services and Indigenous Affairs and Other Legislation Amendment (2008 Budget and Other Measures) Act 2008 (No. 63 of 2008).
16.7 The $150,000 threshold was announced in the 2008-09 Budget and will be indexed in accordance with the indexation arrangements applying to the $150,000 combined adjusted taxable income threshold that has applied on eligibility for Family Tax Benefit (Part B) from 1 July 2008.
16.8 Dependants for the purposes of the dependency tax offsets are the taxpayer's spouse; child-housekeeper; housekeeper; invalid-relative; or taxpayer's parent or parent-in-law. Housekeeper is defined as any person who was wholly engaged in keeping house in Australia for the taxpayer and in caring for particular dependants of the taxpayer. A child-housekeeper is any child of the taxpayer who was wholly engaged in keeping house for the taxpayer during the income year.
16.9 Taxpayers cannot claim both the dependent spouse tax offset and either the child-housekeeper or housekeeper tax offsets in respect of the same year or period of a year. Pursuant to subsection 159L(3) of the ITAA 1936, taxpayers cannot claim both the child-housekeeper and housekeeper tax offsets in respect of the same period in a year. Further, a taxpayer is unable to claim the dependent spouse, child-housekeeper or housekeeper tax offsets for any part of an income year where they or their spouse are eligible for Family Tax Benefit (Part B).
16.10 The fact a taxpayer is precluded from claiming the dependency tax offsets due to their eligibility for Family Tax Benefit (Part B) does not affect their entitlement for some other tax offsets whose amount increases depending on the taxpayer's dependants. For example, when determining a taxpayer's 'relevant rebate amount' under section 79A of the ITAA 1936 for the purposes of the zone tax offset, the fact a taxpayer is precluded from claiming the dependent spouse tax offset due to eligibility for Family Tax Benefit (Part B) is to be ignored.
16.11 Similarly, the fact a taxpayer has been precluded from claiming a dependency tax offset because their income exceeds the income cap is to be ignored for the purposes of the medical expenses tax offset. Paragraph (e) of the 'dependant' definition for the purposes of the medical expenses tax offset in section 159P of the ITAA 1936 includes a taxpayer's dependent spouse; child-housekeeper; invalid relative; or parent/parent-in-law even if the taxpayer is precluded from claiming a tax offset in respect of maintaining for such dependants because their income exceeds the income cap.
16.12 This extension of the 'dependant' definition was made by the Families, Housing, Community Services and Indigenous Affairs and Other Legislation Amendment (2008 Budget and Other Measures) Act 2008 (No. 63 of 2008).
16.13 If a taxpayer is eligible for a dependency tax offset for only part of the income year then a formula applies for calculating a pro rata offset.
16.14 The reforms to the dependency tax offsets should reduce workforce participation disincentives that can be associated with the dependency tax offsets and more closely align the eligibility criteria used for these offsets with those applying for family assistance.
16.15 The reforms replace all existing income definitions used to determine eligibility for the dependency tax offsets with 'adjusted taxable income', as defined in the A New Tax System (Family Assistance) Act 1999 . As part of this Bill, 'adjusted taxable income' is amended to include 'reportable superannuation contributions' and a broader definition of losses from discretionary activities.
16.16 This ensures greater consistency between the income arrangements for family assistance payments and the dependency tax offsets.
Summary of new law
16.17 Part 5 of Schedule 3 amends all income definitions used to determine eligibility for the dependency tax offsets so that they become 'adjusted taxable income', which is the income definition used for family assistance payment purposes. As part of this process, Part 5 repeals the definition of 'separate net income' from the ITAA 1936.
16.18 Part 5 also links the current $150,000 income cap on eligibility for the dependency tax offsets to the income limit on eligibility for Family Tax Benefit (Part B) and extends the income test to assess the combined income of the taxpayer and their spouse for the purposes of the child housekeeper; housekeeper; invalid relative; and parent/parent-in-law tax offsets. The income cap on eligibility for the dependent spouse tax offset will continue to apply to the taxpayer's income only. However, the income assessed in determining the dependant's income will be 'adjusted taxable income'.
Comparison of key features of new law and current law
| New law | Current law |
| With the exception of the dependent spouse tax offset, eligibility for the dependency tax offsets will be assessed having regard to whether the combined adjusted taxable income of the taxpayer and their spouse is $150,000 (indexed) or less. The income of the taxpayer's dependant will still need to be below applicable unchanged low income thresholds. | A person is eligible for the dependency tax offsets if their taxable income is $150,000 or less and their dependant's income is below applicable low income thresholds. |
| The dependant's 'adjusted taxable income' will be assessed in determining the taxpayer's eligibility for a dependency tax offset. The concept of separate net income will be repealed. | The dependant's separate net income is assessed in determining the taxpayer's eligibility for a dependency tax offset. |
Detailed explanation of new law
16.19 Part 5 of Schedule 3 amends the definition of income used for the purposes of the $150,000 cap on eligibility for the dependency tax offsets from taxable income to 'adjusted taxable income'. 'Adjusted taxable income' has the same meaning as that concept would have in the A New Tax System (Family Assistance) Act 1999 if clauses 3 and 3A of Schedule 3 of that Act were taken not to have been enacted. [Schedule 3, Part 5, item 97]
16.20 The amendments also align the $150,000 income cap with the indexed income limit applied on eligibility for Family Tax Benefit (Part B). A definition of the 'income limit for Family Tax Benefit (Part B)' is inserted in subsection 159J(6) of the ITAA 1936. [Schedule 3, Part 5, item 98]
16.21 Linking the income cap on eligibility for the dependency tax offsets with the income limit for Family Tax Benefit (Part B) prevents some taxpayers, who will be precluded from being eligible for Family Tax Benefit (Part B) due to the income cap, becoming eligible for the dependency tax offsets.
16.22 The 'income limit for Family Tax Benefit (Part B)' will apply to the combined adjusted taxable income of the taxpayer and their spouse in respect of the child-housekeeper; invalid relative; and parent/parent-in-law tax offsets. The income limit on eligibility for the dependent spouse tax offset will apply to the taxpayer's income only. [Schedule 3, Part 5, item 94]
16.23 Given the already low income permitted of a spouse as a condition of taxpayers being eligible to claim the dependent spouse tax offset, it was not considered necessary to extend the income cap to a spouse's income for the purposes of that offset.
16.24 The income limit on eligibility for the housekeeper tax offset was included subsection 159L(3B) of the ITAA 1936. The amendments substitute subsection 159L(3B) with a new subsection that references the revised income cap on eligibility for the other dependency tax offsets in new subsection 159J(1AC). [Schedule 3, Part 5, item 100]
16.25 The income assessed in determining the dependant's income for the purposes of the dependency tax offsets has altered from separate net income to 'adjusted taxable income' so the amendments repeal the definition of separate net income. [Schedule 3, Part 5, item 99]
16.26 The amendments also replace references to the separate net income concept with 'adjusted taxable income'. [Schedule 3, Part 5, items 95 and 96]
16.27 These amendments mean a taxpayer's offset entitlement will reduce by $1 for every $4 by which a dependant's 'adjusted taxable income' exceeds $282 pursuant to subsection 159J(4) of the ITAA 1936.
Example 16.1
Heather and Jane are partners in a same-sex couple. Heather earns $90,000 per annum in salary and wages. Jane is on unpaid leave. Heather wishes to claim the maximum dependent spouse tax offset in respect of Jane for the 2009-10 income year.
While Jane has no employment income, she and Heather jointly own an investment property. The rental income for the property in 2009-10 is $13,000 but the total expenses related to the property are $17,500. That is, the property has made a net rental property loss of $4,500. As joint owners, Heather and Jane split this loss so that both have a $2,250 net rental property loss in 2009-10. Jane has no other income or deductions from investment activities so her total net investment loss is $2,250. As Jane had no other income or fringe benefits amounts for the income year, her 'adjusted taxable income' is $2,250. Heather is ineligible for the maximum dependent spouse tax offset as Jane's adjusted taxable income exceeds $282. However, Heather would still be eligible for some dependent spouse tax offset in accordance with subsection 159J(4) of the ITAA 1936.
16.28 Where a taxpayer has a spouse for only part of the income year, or has multiple spouses in a year, the amendments include a formula for determining the taxpayer's combined income for the purposes of the income limit on eligibility. [Schedule 3, Part 5, item 94]
16.29 Because the amendments to the income cap on eligibility for the dependency tax offsets substitute the former subsection 159J(1AB) with a new subsection, the fact a taxpayer is ineligible to claim a dependent spouse; child-housekeeper; invalid relative; or parent/parent-in-law tax offset due to their income continues to be ignored in determining the taxpayer's dependants for the purposes of the medical expenses tax offset. This is a result of paragraph (e) of the definition of 'dependant' for the purposes of the medical expenses tax offset in subsection 159P(4) of the ITAA 1936.
Example 16.2
Michael wishes to claim the medical expenses tax offset for medical expenses incurred in respect of his mother-in-law during the 2009-10 income year. Michael's combined adjusted taxable income with his spouse is $158,000 so he is not eligible to claim the parent-in-law tax offset. However, this fact is ignored for the purposes of the medical expenses tax offset 'dependant' definition. As a result, Michael's mother-in-law is considered one of his dependants for the purposes of the medical expenses tax offset and he may claim the offset for amounts paid in respect of her medical expenses.
Application and transitional provisions
16.30 These amendments will commence the day after Royal Assent.
16.31 The amendments will apply to assessments for the 2009-10 income year and later income years.
Consequential amendments
16.32 The amendments replace a reference to 'separate net income' in the family actual means test provisions of the Social Security Act 1991 with a reference to 'adjusted taxable income. [Schedule 3, Part 5, item 101]