Explanatory Memorandum
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)Chapter 2 - Pacific Seasonal Workers - reduction in marginal tax rate
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Rates Act 1986 to reduce the lowest marginal tax rate for non-resident workers participating in the Pacific Seasonal Worker Pilot Scheme (Scheme) from 29 per cent to 15 per cent. This change will apply for the 2011-12 year of income.
Context of amendments
2.2 The Scheme was announced in August 2008. It is an important element of the Pacific Engagement Strategy, a whole-of-government strategy to advance our engagement in the Pacific, a key objective announced in the March 2008 Port Moresby Declaration .
2.3 The key objectives of the Scheme are to:
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- assist Australian horticulturalists to source seasonal workers;
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- encourage both skills transfer between Australia and the Pacific Islands, and remittances home to Pacific Islands ; and
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- support Australia's Pacific Engagement Strategy and Pacific Partnerships.
2.4 The proposed changes announced by the Government are designed to:
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- improve remittance outcomes for participants in the Scheme; and
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- address equity concerns raised by the current high effective tax rates applicable to participants in the Scheme.
Improve remittance outcomes
2.5 An important element of the Scheme is developing a remittance stream, providing income directly to households to improve living standards. Remittances are especially important to many Pacific Island countries because their small size, geographic isolation and rapidly growing populations mean that there are very limited employment opportunities.
2.6 As well as raising living standards, remittances allow Pacific Seasonal Workers (and their families) to make investments in human capital and small enterprises. Remittance flows are also an important earner of foreign exchange for many Pacific Island countries.
Reduce high effective tax rate
2.7 Under the tax laws, Pacific Seasonal Workers are likely to be non-residents for income tax purposes. As non-residents, Pacific Seasonal Workers are subject to the higher marginal tax rates that apply to non-residents. They will also not have access to the tax-free threshold or the low income tax offset.
2.8 This can result in relatively high effective tax rates for participants in the Scheme and also undermines the remittance and development goals of the Scheme.
2.9 From a policy perspective, Australia taxes non-residents at a higher rate and denies access to the tax-free threshold on the basis that the taxpayer's home country will address equity concerns through its own progressive rate scale. While this approach may be appropriate for high-income earners from developed tax jurisdictions (the traditional focus of non-resident tax policy), the appropriateness may be questionable for low-income earners from these developing countries. In New Zealand the lowest rate (10.5 per cent) applies to similar workers.
2.10 In addition, there may be logistical difficulties for workers in remote villages to properly access any foreign tax credits from their tax administrations.
2.11 Therefore, in order to address these equity concerns, and to ensure that the remittance objectives of the Scheme are achieved, the Government announced in the 2011-12 Budget that it would reduce the lowest marginal tax rate for Pacific Seasonal Workers to 15 per cent (down from 29 per cent).
Summary of new law
2.12 The lowest marginal tax rate for participants in the Scheme will be reduced from 29 per cent to 15 per cent, effective for the 2011-12 year of income. All other tax brackets for Pacific Seasonal Workers will remain unchanged. The rates for other non-residents will be unaffected by this change.
2.13 The reduced rate will only apply to holders of a Special Program Visa (subclass 416) who are employed by Approved Employers under the Scheme.
Comparison of key features of new law and current law
| New law | Current law |
| The lowest marginal tax rate for Pacific Seasonal Workers will be reduced to 15 per cent. The reduced rate will apply from the first dollar of income up to $37,000. All other tax brackets remain unchanged. | Pacific Seasonal Workers are subject to the normal non-resident tax rates. This means the lowest marginal tax rate of 29 per cent applies from the first dollar of income earned up to $37,000. |
| No change - Pacific Seasonal Workers will continue to be treated as non-residents for all other tax purposes, including not being able to access the tax-free threshold or the low income tax offset. | Non-residents do not have access to the tax-free threshold or the low income tax offset. |
Detailed explanation of new law
2.14 Item 1, of this Schedule inserts new Clause 1A into Part II of Schedule 7 to the Income Tax Rates Act 1986 . New Clause 1A modifies the table in Clause 1 by replacing the 29 per cent rate with the new 15 per cent rate in item 1 in the table.
2.15 Item 2, of this Schedule repeals Clause 1A from 1 July 2016. This allows a sufficient amendment period after the Scheme expires (on 30 June 2012) and also ensures the Income Tax Rates Act 1986 does not contain inoperative provisions.
2.16 Should the Scheme be extended beyond 30 June 2012, appropriate amendments will be made at that time.
Application and transitional provisions
2.17 This measure will apply for the 2011-12 year of income.