House of Representatives

Revised Explanatory Memorandum

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

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 1952.

4.2 This Schedule also amends the ITAA 1936 so a taxpayer eligible for an amount of offset in respect of an invalid spouse or carer spouse is not also entitled to the equivalent amount of dependent spouse tax offset as a component of their zone, overseas forces or overseas civilian tax offset.

Context of amendments

4.3 The Treasurer announced in the 2011-12 Mid-Year Economic and Fiscal Outlook that the Government would phase-out, from 1 July 2012, the dependent spouse tax offset for taxpayers with a dependent spouse born on or after 1 July 1952.

4.4 This reform extends the Government's Building Australia's Workforce package announced in the 2011-12 Budget. As part of this package, from 1 July 2011, the dependent spouse tax offset is only available to taxpayers who maintain a spouse either born before 1 July 1971 or unable to work due to invalidity or carer obligations.

4.5 The dependent spouse tax offset originated in the initial ITAA 1936. It is one of several tax offsets in section 159J of the ITAA 1936 for taxpayers who maintain particular dependants. 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 is $2,355 in 2011-12. The maximum amount of the 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 the dependent spouse tax offset reduces by $1 for every $4 by which the adjusted taxable income of the dependent spouse exceeds $282. This means the effective tax rate on the first $10,000 earned by a spouse is around 25 per cent.

4.8 The taxpayer is entitled to the maximum offset if the dependent spouse has a taxable income of $282 or less. In 2011-12, a dependant spouse could have adjusted income of $9,702 and the taxpayer would still receive some of the dependent spouse tax offset.

4.9 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 is payable to the taxpayer or their spouse, pursuant to section 159JA of the ITAA 1936.

4.10 Taxpayers are also not entitled to the dependent spouse tax offset if their adjusted taxable income is more than the limit for Family Tax Benefit (Part B). The 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 , and is indexed under Part 2 of Schedule 4 to that Act.

4.11 In 2011-12, the income test for Family Tax Benefit (Part B) is adjusted taxable income of $150,000 for the primary earner.

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

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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;

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

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

4.13 Recipients of the zone, overseas forces or overseas civilian tax offset 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 also receive an amount of dependent spouse tax offset under section 159J.

4.14 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 since been repealed in their own right.

4.15 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).

4.16 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 dependant full-time student or child less than 21 years (not being a student) but for the fact that those offsets have not been claimable from 1 July 1976. In 2011-12, the amount of this child-housekeeper (with child) offset is $2,299.

4.17 For taxpayers maintaining a dependent spouse, who would have also been entitled to the child or student offset if those offsets were available, there is a 'notional' dependent spouse (with child) offset. This offset is a higher amount than the dependent spouse tax offset. The maximum notional dependent spouse (with child) offset is indexed in accordance with section 159HA. In 2011-12 the maximum offset is $2,736.

4.18 The base amount for the purposes of the overseas forces and overseas civilian 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.

4.19 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 described 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.

4.20 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.

4.21 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.

Summary of new law

4.22 From 1 July 2012, taxpayers with a dependent spouse born on or after 1 July 1952 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.

4.23 In recognition of community expectations, taxpayers maintaining a dependent spouse born on or after 1 July 1952 who is an invalid, permanently unable to work or providing care, will remain entitled to claim an amount equivalent to the dependent spouse in respect of a dependant 'invalid spouse' or dependent 'carer spouse'.

4.24 Taxpayers with a dependent spouse born on or after 1 July 1952 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 offset. This is in recognition of the limited employment opportunities that may exist in remote or isolated regions or if a person's spouse is deployed overseas.

4.25 Because of their continuing eligibility for the dependent spouse tax offset, taxpayers with a dependent spouse born before 1 July 1952 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).

4.26 By contrast, taxpayers with a dependent spouse born on or after 1 July 1952 would be entitled to the relevant proportion of their dependent spouse tax offset entitlement, assuming no age restriction applied (that is, either the 20 or 50 per cent). 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.

4.27 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 an invalid or carer 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.

4.28 Taxpayers who are eligible for the carer spouse and the invalid spouse rebates will be subject to the same income test that applies to the dependent spouse rebate. Taxpayers are not eligible for the carer, dependent or invalid spouse rebates if their adjusted taxable income is more than the limit of Family Tax Benefit (Part B) for the year. The limit for Family Tax Benefit (Part B) in 2011-12 is $150,000.

4.29 Taxpayers will not be able to claim more than one offset in respect of the same spouse when determining their zone, overseas forces or overseas civilian tax offset entitlements.

Comparison of key features of new law and current law

Detailed explanation of new law

4.30 These amendments give effect to the 2011-12 Mid-Year Economic and Fiscal Outlook measure to phase-out, from 1 July 2012, the eligibility of the dependent spouse tax offset for taxpayers who maintain a dependent spouse born on or after 1 July 1952.

4.31 These amendments also give effect to consequential amendments associated with the introduction of the carer spouse and the invalid spouse tax offset in Table 2 of subsection 159J(2) as part of the 2011-12 Budget measure to phase-out the dependent spouse tax offset.

4.32 Taxpayers who maintain a dependent spouse who is unable to work because of invalidity or care obligations will continue to receive an amount equivalent to the dependent spouse tax offset as though the age restriction did not apply.

4.33 In response to the 2011-12 Budget measure, the Tax Laws Amendment (2011 Measures No. 5) Act 2011 amended the tax law to phase out the dependent spouse tax offset for taxpayers with a spouse born on or after 1 July 1971, except for taxpayers with a dependant who is unable to work due to invalidity or care obligations.

4.34 The Tax Laws Amendment (2011 Measures No. 5) Act 2011 also amended the tax law to introduce the carer spouse tax offset and the invalid spouse tax offset.

4.35 The carer spouse tax offset is available to a taxpayer with a dependent spouse who is unable to work because of care obligations. A carer spouse is a person who is a spouse of the taxpayer, being a person who is wholly engaged in providing care to an invalid relative; or to whom a carer allowance or carer payment is being paid pursuant to the Social Security Act 1991 or to whom a carer service pension is being paid pursuant to the Veterans' Entitlements Act 1986 .

4.36 The invalid spouse tax offset is available to taxpayers with a dependent spouse who is unable to work because of invalidity. An invalid spouse is a person who is a spouse of the taxpayer, being a person who is in receipt of a disability support pension or a special needs disability support pension or has been certified by certain professionals as having a continuing inability to work. The certificate must have been issued for the purpose of examining the dependant's eligibility for disability support pension under the Social Security Act 1991 by:

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

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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).

4.37 The tax law currently allows taxpayers to receive a proportion of any invalid spouse or carer spouse entitlement in determining the zone, overseas forces or overseas civilian offset, in addition to a proportion of dependent spouse tax offset.

4.38 Amendments are necessary to ensure that a taxpayer eligible for an amount of offset in respect of an 'invalid spouse' or 'carer spouse' is not also entitled to the equivalent amount of dependent spouse tax offset as a component of their zone, overseas forces or overseas civilian tax offset.

4.39 The amendments to sub-subparagraph 23AB(7)(a)(ii)(B), subsection 79A(4) (paragraph (b) of the definition of 'relevant rebate amount') and subsection 79B(6) (paragraph (b) of the definition of 'concessional rebate amount') provide clarity that these amendments relate to a rebate to which the taxpayer is entitled to in respect of a dependant who is an invalid relative for the purpose of class 5 in the table in subsection 159J(2) or a dependant included in class 6 in the table in subsection 159J(2). These amendments remove the reference to invalid spouse or carer spouse. A dependant for the purpose of class 6 in the table in subsection 159J(2) means a parent of the taxpayer or of the taxpayers spouse. [Schedule 4, items 1, 4 and 8]

4.40 The amendments to subparagraphs 23AB(7)(a)(iii), 79A(2)(a)(ii), 79A(2)(d)(ii) and 79A(2)(e)(ii) provide clarity that a taxpayer is not entitled to claim more than one amount of offset in respect of the same spouse as a component of their zone, overseas forces or overseas civilian tax offset in 2011-12 and later income years. These amendments will ensure that taxpayers eligible for the carer spouse or the invalid spouse tax offsets do not receive an unintended windfall gain as a result of equivalent offsets for taxpayers with a spouse who is unable to work because of invalidity or carer obligations. [Schedule 4, items 2, 3 and 6]

4.41 The amendments to subparagraphs 79B(2)(a)(iii) and 79B(4A)(b)(iii) and paragraph 79B(4)(c) and provide clarity that if the taxpayer is not entitled to a rebate under section 159J in respect of a dependent included in class 1 in the table in subsection 159J(2) or an invalid spouse or carer spouse for the purpose of class 5 in the table in subsection 159J(2), the aggregate rebates available under section 23AB, 79A or 79B cannot exceed an amount equal to the dependent spouse concessional amount. [Schedule 4, items 5 and 7]

4.42 The amendments to paragraph 159J(1AB)(a) ensure that taxpayers eligible for a rebate in respect of an invalid spouse or carer spouse in class 5 have the same income test as if they were eligible for a rebate in respect of a dependent in class 1 in the table in subsection 159J(2). [Schedule 4, item 9]

4.43 The amendments to paragraph 159J(1AB)(b) clarify that the income test in subsection 159J(1AC) only applies to taxpayers eligible for a rebate in respect of a dependent in class 2 or 6, or an invalid relative for the purpose of class 5 in the table in subsection 159J(2). [Schedule 4, item 10]

4.44 The amendments to subsection 159J(1C) change the eligibility for the dependent spouse tax offset so that from 1 July 2012, the dependent spouse tax offset is only available to taxpayers who maintain a dependent spouse born before 1 July 1952. [Schedule 4, item 11]

4.45 Taxpayers with a dependent spouse born before 1 July 1952 will continue to 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 resident of Zone B). This means the calculation of the amount of zone, overseas forces and overseas civilian tax offsets for taxpayers with a dependent spouse born before 1 July 1952 will not change.

Application and transitional provisions

4.46 The amendments made by items 1 to 10 apply to assessments for the 2011-12 income year and later income years. As the zone, overseas forces and overseas civilian offsets are paid on assessment, no taxpayers are disadvantaged from these amendments. [Schedule 4, item 12]

4.47 The amendments made by item 11 apply to assessments for the 2012-13 income year and later income years. [Schedule 4, item 12]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Phasing out the dependent spouse tax offset

4.48 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

4.49 This Schedule amends the ITAA 1936 to restrict the eligibility for the dependent spouse tax offset to taxpayers with a dependant spouse born before 1 July 1952.

4.50 This Schedule also amends the ITAA 1936 so a taxpayer eligible for an amount of offset in respect of an invalid spouse or carer spouse is not also entitled to the equivalent amount of dependent spouse tax offset as a component of their zone, overseas forces or overseas civilian tax offset.

Human rights implications

4.51 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.52 This Schedule is compatible with human rights as it does not raise any human rights issues.