Explanatory Memorandum
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)Chapter 6 - Increase in the medical expenses tax offset claim threshold
Outline of chapter
6.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to increase the threshold (the claim threshold) above which a taxpayer may claim the medical expenses tax offset to $2,000. It also commences annually indexing the claim threshold to the consumer price index (CPI).
Context of amendments
6.2 Currently a taxpayer may claim a tax offset for 20 per cent of net medical expenses exceeding the claim threshold of $1,500 in an income year.
6.3 Net medical expenses are the total medical expenses paid by a taxpayer less available reimbursements which a taxpayer, or any other person, has received or is entitled to receive in respect of those medical expenses. Reimbursements may include refunds from Medicare and/or private health insurers.
6.4 A taxpayer may combine net medical expenses paid in respect of resident dependants as well as themselves in order to reach the claim threshold.
6.5 The claim threshold has been periodically increased in the past. It was last increased in 2002 and since that time both medical costs and wages have increased significantly, making it easier for taxpayers to become eligible to claim the medical expenses tax offset.
6.6 The changes detailed in this Schedule will help reduce the long term cost to the budget of a rapidly growing expenditure and place the medical expenses tax offset on a more sustainable footing.
Summary of new law
6.7 These amendments increase the claim threshold from $1,500 to $2,000 per annum, with effect from 1 July 2010.
6.8 These amendments also commence annually indexing the claim threshold to the CPI. The first indexation adjustment to the claim threshold will occur on 1 July 2011.
Comparison of key features of new law and current law
| New law | Current law |
| In 2010-11, the amount of medical expenses tax offset is calculated as 20 per cent of net medical expenses exceeding the claim threshold of $2,000.
From 2011-12, the claim threshold will be annually indexed on the basis of changes in the CPI. |
The amount of medical expenses tax offset is calculated as 20 per cent of net medical expenses exceeding the claim threshold of $1,500 per annum.
The claim threshold is not indexed. |
Detailed explanation of new law
6.9 Currently section 159P of the ITAA 1936 allows a taxpayer to claim a tax offset for 20 per cent of net medical expenses exceeding the claim threshold of $1,500 in an income year.
6.10 This Schedule increases the claim threshold above which a taxpayer can claim the medical expenses tax offset from $1,500 to $2,000. [Schedule 5, item 4]
6.11 This Schedule also inserts provisions to index the claim threshold in future years. It adds the claim threshold to the list of amounts indexed in accordance with the formula specified in section 159HA of the ITAA 1936. [Schedule 5, items 2 and 3]
6.12 The formula in section 159HA indexes specified amounts on the basis of changes in the CPI.
6.13 Should the indexation factor calculated in accordance with subsection 159HA(3) be less than one (meaning the CPI was negative for the year), the claim threshold will continue to be indexed by this amount. This means the claim threshold for an income year can be lower than the claim threshold in respect of the previous income year.
6.14 This Schedule amends the heading to section 159HA to reflect the fact that, from the 2011-12 income year, this section will apply to the indexation of the medical expenses tax offset claim threshold as well as other specified rebate amounts. It also corrects the heading by removing the reference to section 159K, which is no longer indexed. [Schedule 5, item 1]
Application and transitional provisions
6.15 The amendment made by item 4 applies to assessments for the 2010-11 income year and later income years.
6.16 The amendments made by items 1 to 3 apply to assessments for the 2011-12 income year and later income years.
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- This ensures the claim threshold is set at $2,000 for the 2010-11 income year and the indexation of the claim threshold applies for the 2011-12 income year and later income years.