House of Representatives

Explanatory Memorandum

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

Chapter 4 - Phasing out the dependent spouse tax offset

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to restrict eligibility for the dependent spouse tax offset to taxpayers with a dependent spouse born before 1 July 1971.

4.2 This Schedule also ensures that taxpayers eligible for the zone, overseas forces or overseas civilian tax offsets, or whose dependent spouse is a carer, an invalid or permanently unable to work, are not affected by this measure.

Context of amendments

4.3 The Treasurer announced in the 2011-12 Budget that the Government will phase out the dependent spouse tax offset for dependent spouses who are aged less than 40 on 1 July 2011, to help encourage more Australians into paid employment.

4.4 The reform is intended to remove the disincentive for younger dependent spouses without children to remain out of the workforce, and forms part of the Government's Building Australia's Future Workforce package.

4.5 The dependent spouse tax offset originated in the initial ITAA 1936. It is one of a number of tax offsets in section 159J of the ITAA 1936 for taxpayers that maintain particular types of dependant. Other examples are the invalid relative tax offset, parent/parent-in-law tax offset and the child-housekeeper tax offset.

4.6 The maximum dependent spouse tax offset was $2,286 in 2010-11 and will be $2,355 in 2011-12. The maximum amount of offset is indexed each year with reference to the All Groups Consumer Price Index number in accordance with section 159HA of the ITAA 1936.

4.7 The amount of offset reduces by $1 for every $4 by which the adjusted taxable income of the dependent spouse exceeds $282. That is, the effective tax rate on the first $10,000 earned by a spouse is around 25 per cent, meaning that dependent spouses, often women, face the prospect of being penalised for doing some part time work. The taxpayer is entitled to the maximum offset if the dependent spouse has adjusted taxable income of $282 or less. In 2010-11, a dependent spouse could have adjusted taxable income of $9,426 and the taxpayer would receive some offset.

4.8 Taxpayers cannot claim the dependent spouse tax offset for any part of the income year that they are a member of a Family Tax Benefit (Part B) family without shared care, or parental leave pay is payable to the taxpayer or their spouse, pursuant to section 159JA of the ITAA 1936.

4.9 Taxpayers are also not entitled to the dependent spouse tax offset if their adjusted taxable income is more than the 'income limit for Family Tax Benefit (Part B)'. Income limit for Family Tax Benefit ( Part B ) is defined as the 'amount specified in subclause 28B(1) of Schedule 1 to the A New Tax System (Family Assistance) Act 1999 , as indexed under Part 2 of Schedule 4 to that Act'.

4.10 The amount of dependent spouse tax offset is relevant in determining the amount of other concessional tax offsets to which a taxpayer is entitled. These other tax offsets are the:

•

zone tax offset (section 79A of the ITAA 1936): which is available to residents of remote or isolated locations that are prescribed in Schedule 2 to the ITAA 1936;

•

overseas forces tax offset (section 79B of the ITAA 1936), which is available to Australian Defence Force personnel who have served at overseas locations that have been specified by the Treasurer pursuant to subsection 79B(5) of the ITAA 1936; and

•

overseas civilian tax offset (section 23AB of the ITAA 1936): which is available to personnel that have served overseas under the control of the United Nations and are prescribed in Regulation 6 of the Income Tax Regulations 1936 .

4.11 Recipients of the zone, overseas forces or overseas civilian tax offsets receive a base amount of offset. In addition, they also receive up to 50 per cent of any dependency tax offsets to which they are entitled that are or were provided for in section 159J of the ITAA 1936. These offsets are described as the 'relevant rebate amount' for the purposes of the zone tax offset and 'concessional rebate amount' for the purposes of the overseas forces tax offset. In addition, eligible taxpayers receive an amount of dependent spouse tax offset under section 159J.

4.12 The amounts of dependency tax offset relevant to the calculation of a taxpayer's zone, overseas forces or overseas civilian tax offset amount include 'notional' dependency tax offsets. These are offsets that were previously available to taxpayers maintaining certain types of dependants but have been repealed in their own right.

4.13 Examples are the offset for taxpayers maintaining a full-time student aged less than 25 and the offset for a child aged less than 21 (not being a student). These offsets are allowed for in the table in subsection 159J(2) but, from 1 July 1976, they have not been able to be claimed by taxpayers pursuant to subsection 159J(1A).

4.14 Subsection 159J(1B) provides for an increased child-housekeeper tax offset if the taxpayer would have been entitled to an offset in respect of a dependent full-time student or child less than 21 (not being a student) but for the fact those offsets have not been claimable from 1 July 1976. In 2010-11, the amount of this child-housekeeper (with child) offset was $2,232 and it will be $2,299 in 2011-12.

4.15 For taxpayers maintaining a dependent spouse, who would have also been entitled to the child or student offset if those offsets still existed, there is a 'notional' dependent spouse (with child) offset. This offset is a higher amount than the dependent spouse tax offset.

4.16 The maximum 'notional' dependent spouse (with child) offset is indexed in accordance with section 159HA. In 2010-11, the maximum amount was $2,656 and it will be $2,736 in 2011-12.

4.17 The base amount for the purposes of the overseas forces and overseas civilian tax offsets is $338 and the taxpayer is also entitled to 50 per cent of their dependency tax offsets entitlements as a component of their offset.

4.18 Taxpayers eligible for the zone tax offset may receive three different base amounts depending on the zone in which they reside. The zones are Zone A, Zone B and 'special areas' within zones. 'Special areas' are defined in subsection 79A(3D) of the ITAA 1936 and comprise points in Zone A or Zone B that are more than 250 kilometres from the centre point of the nearest urban centre with a census population of more than 2,500 as at 1 November 1981.

4.19 Taxpayers residing in Zone A with a dependent spouse are eligible for up to $338 plus 50 per cent of their dependency tax offsets entitlement as a component of their offset.

4.20 Taxpayers residing in Zone B with a dependent spouse are eligible for up to $57 plus 20 per cent of their dependency tax offsets entitlement. Taxpayers residing in 'special areas' within Zone A or Zone B are eligible for up to $1,173 plus 50 per cent of their dependency offsets entitlement.

4.21 As noted above, section 159J of the ITAA 1936 provides for a number of offsets that assist taxpayers who maintain particular types of dependants. These include the invalid relative tax offset which is available to taxpayers who maintain an 'invalid relative' as defined in subsection 159J(6).

4.22 Invalid relative means a person aged 16 or more who is a child (including an adopted child, step-child or ex-nuptial child), brother or sister of the taxpayer. The person must be in receipt of a disability support pension or a special needs disability support pension or have been certified by certain professionals as having a continuing inability to work.

4.23 The certificate must have been issued for the purpose of examining the dependant's eligibility for disability support pensions under the Social Security Act 1991 (Cth) by:

•

a medical officer of the 'Health Department', being the department that deals with matters arising under section 1 of the National Health Act 1953 (Cth) that is administered by the 'Health Minister', being the Minister who administers section 1 of the National Health Act 1953 (Cth); or

•

a medical practitioner appointed by the 'Families Secretary', being the Secretary of the department that deals with matters arising under the A New Tax System (Family Assistance ) ( Administration) Act 1999 (Cth) that is administered by the 'Families Minister', being the Minister administering section 1 of the A New Tax System (Family Assistance ) ( Administration) Act 1999 (Cth).

4.24 The 'invalid relative' definition does not currently include a dependent spouse of the taxpayer. The definition also does not include the brother, sister or child of a spouse of the taxpayer. The maximum invalid relative tax offset amount in 2010-11 is $839. The maximum amount of this offset is indexed each year with reference to the All Groups Consumer Price Index number in accordance with section 159HA of the ITAA 1936.

Summary of new law

4.25 From 1 July 2011, taxpayers with a dependent spouse born on or after 1 July 1971 will no longer be entitled to claim the dependent spouse tax offset. This means the dependent spouse tax offset will be gradually phased out as the population ages to remove disincentives to enter the workforce for younger dependent spouses without children.

4.26 In recognition of the limited employment opportunities for some dependent spouses, taxpayers maintaining a dependent spouse born on or after 1 July 1971 who is an invalid or permanently unable to work or providing care, will remain entitled to claim an amount equivalent to the dependent spouse tax offset in respect of a dependent 'invalid spouse' or dependent 'carer spouse'.

4.27 Taxpayers with a dependent spouse born on or after 1 July 1971 who are eligible for the zone, overseas forces or overseas civilian tax offsets will remain eligible for an amount equivalent to the dependent spouse tax offset as a component of their zone, overseas forces or overseas civilian tax offset. This is in recognition of limited employment opportunities that may exist in remote or isolated regions or if a person's spouse is deployed overseas.

4.28 Taxpayers eligible for the zone, overseas forces or overseas civilian tax offsets would also continue to be entitled to either 20 or 50 per cent of their dependent spouse tax offset entitlement as though no age restriction applied. The proportion of dependent spouse tax offset entitlement that could be claimed would continue to be higher if the taxpayer was eligible for the notional child or student offsets.

4.29 Because of their continuing eligibility for the dependent spouse tax offset, taxpayers with a dependent spouse born before 1 July 1971 will only be entitled to an amount equating to 50 per cent of their dependent spouse tax offset entitlement as part of their zone, overseas forces or overseas civilian tax offset (or 20 per cent if they are a resident of Zone B).

4.30 By contrast, taxpayers with a dependent spouse born on or after 1 July 1971 would be entitled to the relevant proportion of their dependent spouse tax offset entitlement, assuming no age restriction applied. In addition, the taxpayer could claim the full amount of this dependent spouse tax offset entitlement as a component of their zone, overseas forces or overseas civilian tax offset.

4.31 If a taxpayer is entitled to the dependent spouse tax offset in respect of a dependent spouse born before 1 July 1971, they will not be entitled to claim the equivalent amount in respect of an 'invalid spouse' or a 'carer spouse'. Taxpayers will also not be entitled to claim an amount in respect of a 'carer spouse' if they have already claimed an amount in respect of an 'invalid spouse'.

4.32 Taxpayers eligible for more than one of the zone, overseas forces or overseas civilian tax offsets will not be able to claim more than the full amount of offset in respect of a dependent spouse across each offset. That is, a taxpayer will not be able to receive more than their maximum dependent spouse entitlement if they have eligibility for both an amount of zone and overseas forces tax offset.

Comparison of key features of new law and current law

Detailed explanation of new law

4.33 These amendments give effect to the 2011-12 Budget measure to phase out eligibility for the dependent spouse tax offset for taxpayers who maintain a dependent spouse born on or after 1 July 1971 but to retain eligibility for an amount equivalent to the dependent spouse tax offset entitlement as though no age restriction applies for particular taxpayers.

4.34 The amendments to section 23AB ensure that taxpayers eligible for the overseas civilian tax offset remain entitled to claim an amount equivalent to 50 per cent of their dependent spouse tax offset entitlement as though the age restriction does not apply. [ Schedule 4, item 1, sub-subparagraph 23AB(7 )( a )( ii )( D )]

4.35 The current disregard of section 159JA of the ITAA 1936 will continue to apply. That is, a taxpayer will be entitled to 50 per cent of their dependent spouse tax offset entitlement, assuming no age restriction applies and also that there is no rule in section 159JA that precludes the taxpayer from claiming the dependent spouse tax offset while they are a member of a Family Tax Benefit (Part B) family or the taxpayer or their spouse is in receipt of parental leave pay.

4.36 Further, if the taxpayer maintains a dependent spouse born on or after 1 July 1971 and also maintains a child under 21 (not being a student) or a full-time student under 25, they will be entitled to 50 per cent of the higher, 'notional' dependent spouse (with child) offset amount.

4.37 For ease of understanding, these assumptions will be included in a new subsection 23AB(7A). The assumptions are the disregard of section 159JA, disregard of subsection 159J(1C) and assumed amendment of the wording in subsection 159J(1B) and the table in subsection 159J(2). [ Schedule 4, item 3, subsection 23AB(7A )]

4.38 The amendments also mean that taxpayers eligible for the overseas civilian tax offset who are maintaining a dependent spouse born on or after 1 July 1971 remain entitled to claim the full amount of dependent spouse tax offset, assuming no age restriction applies, as a component of their overseas civilian tax offset amount. [ Schedule 4, item 2, subparagraph 23AB(7 )( a )( iii )]

4.39 That is, taxpayers eligible for the overseas civilian tax offset who are maintaining a dependent spouse born on or after 1 July 1971, will be entitled to up to $338 as their base amount plus the full amount of dependent spouse tax offset as though no age restriction applies. They will also be entitled to 50 per cent of their dependent spouse tax offset amount, assuming no age restriction applied, section 159JA did not apply and other amendments had been made to section 159J.

4.40 The amendments to section 79A ensure that taxpayers eligible for the zone tax offset remain entitled to either 20 or 50 per cent of their dependent spouse tax offset entitlement as though no age restriction applies. Further, zone tax offset recipients with a dependent spouse will be entitled to claim the 'dependent spouse relevant rebate amount' as a component of their zone tax offset amount. [ Schedule 4, item 4, paragraphs 79A(2 )( a ), ( d ) and ( e )]

4.41 The dependent spouse relevant rebate amount is defined as the amount of dependent spouse tax offset that a taxpayer is eligible for, assuming no age restriction applied. [ Schedule 4, item 5, subsection 79A(4 )]

4.42 A taxpayer's 'relevant rebate amount' is amended so that the age restriction is disregarded in determining the dependent spouse tax offset component of this amount. This means that, for example, a taxpayer with a dependent spouse born on or after 1 July 1971, who is also maintaining a child under 21 (not being a student), will be eligible for the relevant proportion of the 'notional' dependent spouse (with child) tax offset as part of their zone tax offset entitlement. [ Schedule 4, item 6, subsection 79A(4 )]

4.43 The amendments to subsection 79B(2) ensure that taxpayers entitled to the overseas forces tax offset remain eligible for their dependent spouse tax offset entitlement as though the age restriction did not apply. [ Schedule 4, items 7 and 8, subparagraphs 79B(2 )( a )( ii ) and ( iii )]

4.44 The amendments to subsection 79B(4) mean that taxpayers entitled to the overseas forces tax offset and either the overseas civilian tax offset or zone tax offset, may receive up to an amount equivalent to their dependent spouse tax offset entitlement as though no age restriction applies, as well as $338 plus 50 per cent of their 'concessional rebate amount'. [ Schedule 4, items 9 and 10, subsection 79B(4 )]

4.45 A taxpayer will not be eligible for an amount of overseas forces tax offset if they are entitled to the zone tax offset and the amount of their zone tax offset is greater than $338 plus 50 per cent of the taxpayer's 'concessional rebate amount' plus the full amount of dependent spouse tax offset entitlement disregarding the age restriction. [ Schedule 4, item 11, subsection 79B(4A )]

4.46 To ensure taxpayers maintaining a spouse born on or after 1 July 1971 remain entitled to 50 per cent of their dependent spouse tax offset amount, assuming the age restriction does not apply, an amendment is made to the definition of 'concessional rebate amount'. [ Schedule 4, item 12, subsection 79B(6 )]

4.47 There is also an amendment to insert a definition of dependent spouse concessional rebate amount , being an amount of dependent spouse tax offset that a taxpayer would be eligible for if the age restriction did not apply. [ Schedule 4, item 13, subsection 79B(6 )]

4.48 The maximum amount of dependent spouse tax offset and 'notional' dependency tax offsets are indexed in accordance with section 159HA of the ITAA 1936. In response to the inclusion of the 'notional' dependent spouse with child component of the overseas civilian tax offset in new subsection 23AB(7A), there is a need to update the section reference of the amount to be indexed in the 'indexable amount' definition in section 159HA. [ Schedule 4, item 14, subsection 159HA(7 )]

4.49 The amendments then give effect to the Government decision to phase out the dependent spouse tax offset for taxpayers with a dependent spouse born on or after 1 July 1971. [ Schedule 4, item 15, subsection 159J(1C )]

4.50 The amendments also ensure that if a taxpayer is entitled to claim the dependent spouse tax offset in respect of a dependent spouse born before 1 July 1971, they are not also entitled to claim an amount in respect of an 'invalid spouse' or a 'carer spouse'. [ Schedule 4, item 15, subsection 159J(ID )]

4.51 Further, the amendments ensure that a taxpayer entitled to claim an amount in respect of an 'invalid spouse' is not also able to claim an amount in respect of that same spouse as a 'carer spouse'. [ Schedule 4, item 15, subsection 159J(1E )]

4.52 A taxpayer's 'invalid spouse' or 'carer spouse' are included in class 5 of the table in subsection 159J(2) of the ITAA 1936. As a result, the existing invalid relative tax offset is extended to include two new amounts that equate to the amount of dependent spouse tax offset in class 1. These amounts will be able to be claimed by taxpayers maintaining a 'carer spouse' or an 'invalid spouse'. [ Schedule 4, item 16, subsection 159J(2 ) ( item 5 in the table )]

4.53 The amount of offset included in the table for an 'invalid spouse' or 'carer spouse' is $2,100. In accordance with section 159HA, this amount is deemed to have been indexed from 1 July 2008 so the maximum amount of the offsets is $2,355 in 2011-12. This amount will be indexed in accordance with section 159HA in future years.

4.54 There are amendments to subsection 159J(3) to reflect a drafting preference for 'or' to be added at the end of paragraphs. [ Schedule 4, item 17, subsection 159J(3 )]

4.55 Further amendments to subsection 159J(3) mean that where a taxpayer maintains a dependent 'invalid spouse' or 'carer spouse' for part of the income year only, then part of the offset will be allowable to the taxpayer in respect of that dependant as is reasonable to the Commissioner of Taxation (Commissioner). [ Schedule 4, item 18, subsection 159J(3 )]

4.56 The amendment to subsection 159J(3A) ensures that a person satisfying the definition of an 'invalid spouse' or 'carer spouse' of the taxpayer will be deemed to have domicile in Australia at all times that the taxpayer has domicile in Australia. That is, the taxpayer may maintain an 'invalid spouse' or 'carer spouse' who is not a resident of Australia but still be entitled to claim an amount of offset in respect of that dependant. [ Schedule 4, item 19, subsection 159J(3A )]

4.57 New subsection 159J(5CA) is inserted to clarify that a reference to a dependant included in class 1 in the table in subsection (2) includes a reference to a person who is an 'invalid spouse' or 'carer spouse'. [ Schedule 4, item 20, subsection 159J(5CA )]

4.58 The amendments to subsection 159J(5D) ensure that a child of the taxpayer will be deemed not to have been engaged in keeping house for the taxpayer for any part of the year that the taxpayer is entitled to an offset in respect of a dependent 'invalid spouse' or a dependent 'carer spouse'. [ Schedule 4, item 21, subsection 159J(5D )]

4.59 Further, there are also amendments to subsection 159J(5D) to ensure a child of the taxpayer is deemed not to have been engaged in keeping house for the taxpayer for any part of the year that the taxpayer would have been entitled to a dependent spouse tax offset in respect of their spouse but for the operation of the age restriction in subsection 159J(1C). [ Schedule 4, item 21, subsection 159J(5D )]

4.60 Carer spouse is defined as a spouse of the taxpayer who is wholly engaged in providing care to an 'invalid relative', which includes an invalid relative of the taxpayer's spouse; or to whom a Carer Allowance, Carer Payment or Carer Service Pension is being paid. [ Schedule 4, item 22, subsection 159J(6 )]

4.61 The amendments expand the 'invalid relative' definition so that it includes a child, brother or sister aged more than 16 years of the taxpayer's spouse as well as a child, brother or sister aged more than 16 years of the taxpayer. [ Schedule 4, item 23, subsection 159J(6 )]

4.62 The definition of 'invalid spouse' is inserted into subsection 159J(6). Invalid spouse is defined as a spouse of the taxpayer who meets the requirements for disability and continuing inability to work that are currently imposed on an 'invalid relative', as defined in subsection 159J(6). [ Schedule 4, item 24, subsection 159J(6 )]

4.63 That is, the 'invalid spouse' must be receiving a Disability Support Pension or Special Needs Disability Support Pension or have a certificate from an appropriate medical officer or medical practitioner as outlined in paragraph 4.23.

4.64 The amendment to subsection 159JA(1) of the ITAA 1936 adds a taxpayer's 'invalid spouse' or 'carer spouse' to the classes of dependants referred to in that subsection. As a result, if the taxpayer is a member of a Family Tax Benefit (Part B) family, or they or their 'invalid spouse' or 'carer spouse' is receiving parental leave pay, the taxpayer will be unable to claim an offset for that part of the year in respect of the dependant. [ Schedule 4, item 25, paragraph 159JA(1 )( a )]

4.65 A taxpayer's 'invalid spouse' or 'carer spouse' is also added to the classes of dependants in the formula calculating the offset allowable to taxpayers where shared care arrangements apply. [ Schedule 4, item 26, paragraph 159JA(3 )( b )]

4.66 Consistent with drafting preferences, there are amendments to subsection 159L(1) to add the word 'or'. [ Schedule 4, item 27, subsection 159L(1 )]

4.67 The amendments further revise subsection 159L(1) to confirm that a taxpayer may claim the housekeeper tax offset in respect of a housekeeper who is wholly engaged in keeping house in Australia for the taxpayer and in caring for an 'invalid spouse' or 'invalid relative'. [ Schedule 4, item 28, subsection 159L(1 )]

4.68 As the definition of 'invalid spouse' includes a spouse receiving the Disability Support Pension, the amendments replace former paragraph 159L(1)(c) as it is no longer required. Former paragraph 159L(1)(c) allowed a taxpayer to claim the housekeeper tax offset in respect of a housekeeper who was wholly engaged in keeping house for the taxpayer in Australia and in caring for the taxpayer's spouse who was receiving a Disability Support Pension. [ Schedule 4, item 29, paragraph 159L(1 )( c )]

4.69 The amendments mean that a housekeeper will be deemed to have not been wholly engaged in keeping house for the taxpayer, as required for the purposes of the housekeeper tax offset, during any part of the income year that the taxpayer is entitled to an offset in respect of a 'carer spouse'. [ Schedule 4, item 30, subsection 159L(3 )]

4.70 There are amendments to subsection 159L(4) to clarify that a taxpayer is not entitled to claim the housekeeper tax offset if they have a spouse unless that spouse is an 'invalid spouse' or the Commissioner is of the opinion that it is just to allow an offset because of special circumstances. [ Schedule 4, item 31, subsection 159L(4 )]

4.71 In response to the inclusion of 'invalid spouse' and 'carer spouse' as categories of dependants in class 5 in the table in subsection 159J(2), it is necessary to amend the definition of 'dependant' for the purposes of the net medical expenses tax offset in section 159P of the ITAA 1936. The amendment to the 'dependant' definition clarifies that paragraph (ca) only applies to an 'invalid relative'. An 'invalid spouse' or 'carer spouse' of the taxpayer would be captured by 'spouse of the taxpayer' in paragraph (a) of the definition. [ Schedule 4, item 32, subsection 159P(4 )]

Application and transitional provisions

4.72 The restriction of eligibility for the dependent spouse tax offset in respect of dependent spouses born on or after 1 July 1971, and revisions to the zone, overseas forces and overseas civilian tax offsets and the invalid relative tax offset, take effect for the 2011-12 income year and later income years. [ Schedule 4, item 34 ]

Consequential amendments

4.73 The amendment to section 13-1 of the Income Tax Assessment Act 1997 , which lists offsets that are claimable, includes the offset available in respect of a taxpayer's 'invalid spouse' or 'carer spouse' in the item in the table for 'invalid relative'. [ Schedule 4, item 33, section 13-1 ]