House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP)

Chapter 2 - Better targeting of the Zone Tax Offset

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to ensure that the Zone Tax Offset (ZTO) is appropriately targeted to people genuinely living in the designated geographical Zones, by limiting access to the ZTO to those people whose usual place of residence is within a Zone.

2.2 Consequently, people who work in the Zones but fly or drive into those Zones from their usual place of residence that is located outside of the Zone. Those people are assessed as residing at their usual place of residence and not their residence while working.

Context of amendments

2.3 The ZTO is a non-refundable tax offset available to taxpayers who reside in specified remote areas. The ZTO, when introduced in 1945, was intended to compensate recipients for the disadvantages of living in remote areas including distance, uncongenial climate and the higher cost of living.

2.4 There are two designated Zones for claiming the ZTO, Zone A and Zone B, as well as 'special areas' (representing particularly isolated areas) within these Zones. Claimants of the ZTO are entitled to a base amount per year of $338 in Zone A, $57 in Zone B, $1,173 in the special areas, as well as a 20 per cent loading (for Zone B) or 50 per cent loading (for Zone A and special areas). Loading is based on relevant dependency offsets where applicable.

2.5 Section 79A of the ITAA 1936 provides that to be eligible for the ZTO, a taxpayer must reside or work in a specified remote area for 183 days or more in an income year.

2.6 The residency test does not require a ZTO recipient to spend 183 days continuously in the relevant Zone. As a result, the current law allows fly-in fly-out or drive-in drive-out (FIFO) workers to claim the offset if they spend 183 days or more in the Zone in an income year. This is the case even when their usual place of residence is not located within a Zone.

2.7 This is inconsistent with the intention of the ZTO which is designed to compensate for the difficulties associated with living in a remote area. When the ZTO was enacted, it was not anticipated that people living in capital cities, flying into and out of the relevant Zones for their employment, would have an entitlement to claim. Further, many FIFO workers are compensated by their employer for their out of pocket expenses and other adversities associated with their workplace being located in a remote area. Providing additional monetary compensation in these circumstances is not an appropriate use of the ZTO.

2.8 Under the new law, taxpayers will be taken to be a resident of the area incorporating their usual place of residence rather than being considered a resident of the area incorporating their place of employment should that area be located within a Zone or a special area of a Zone.

2.9 However, where a taxpayer has their usual place of residence within a Zone (for 183 days or more) and travels to a workplace outside of the Zone, these taxpayers will retain their entitlement to the ZTO (see example 2.2 below).

2.10 Recent changes to offsets have made the Dependant (Invalid and Carer) Tax Offset (DICTO) part of the ZTO if taxpayers meet the eligibility requirements for accessing the DICTO.

Example 2.1

A taxpayer whose spouse is unable to work due to invalidity or carer obligations may be eligible for the DICTO. Such a taxpayer may be eligible for an additional 20 or 50 per cent of the DICTO entitlement as a component of their ZTO. For example, Matt and Leila live in Darwin in Zone A. Matt travels to Kununurra (Zone A special area) for work on a FIFO basis and Leila stays at home where she cares for Matt's disabled father in their residence.

Matt is able to claim the ZTO for Zone A, but not for the Zone A special area where he works. Matt is also able to claim the DICTO as Leila is unable to work due to her carer responsibilities caring for Matt's father.

Summary of new law

2.11 Under the new law, a taxpayer's usual place of residence will be relevant along with other eligibility tests in section 79A of the ITAA 1936 to determine their eligibility for the ZTO. This is in contrast to the current law which tests where a taxpayer has spent a minimum of 183 days; whether as a result of their employment, in attending their workplace or if they actually maintain their usual place of residence in that area.

2.12 The current law enables taxpayers to claim ZTO even where they do not maintain their usual place of residence in a Zone, provided that they spend 183 days or more in the Zone. This means that FIFO workers are able to access the ZTO even though their usual place of residence is not within a Zone.

Comparison of key features of new law and current law

Detailed explanation of new law

2.13 In order to ensure that the offset is not claimed by people who work in remote areas, but who ordinarily live outside of those areas, eligibility for the ZTO will be restricted. Under the new law, to be eligible for the ZTO, a taxpayer's usual place of residence must be within a prescribed area (Zone). The Zones are described in Schedule 2 in the ITAA 1936. [Schedule 2, items 1 to 14, subsection 79A(2), paragraphs 79A(2)(b) and (c), paragraphs 79A(3B)(a), (b) and (c), subparagraphs 79A(3B)(d)(i), (ii) and (iii), 79A(3B)(e)(i) and (ii), 79A(3B)(e)(iv) and (v), subsection 79A(3C), paragraphs 79A(3C)(a) and (b) of the ITAA 1936]

Example 2.2

Jonte is an engineer who lives in Darwin (located within Zone A) and travels to Kununurra in Western Australia (located in a Zone A special area) where he is employed in the mining industry. The distance between Darwin and Kununurra is approximately 830km which takes Jonte 10 hours to drive to work from his usual place of residence in Darwin. In his usual shift, Jonte drives to Kununurra, works 14 days at the mine and drives back to Darwin where he remains for 16 days.

Under the existing law, Jonte would be able to claim ZTO for the Zone A special area of Kununurra, even though he lives in Darwin because he is in Kununurra for 183 days or more in a year of income. As a result of these changes, Jonte is no longer able to access the ZTO special area loading because, as a FIFO worker, his usual place of residence is outside of the prescribed area even though, as a result of his employment, he spends 183 days or more within a prescribed special area. Jonte is still able to claim ZTO as his usual place of residence is in Darwin but he cannot access the special area Zone A offset.

Example 2.3

Levi is an engineer who lives in Adelaide. He flies to Alice Springs for twelve day shifts at an engineering firm and then travels back to Adelaide for his days off (which vary between four and eight days in a row). As Levi does not have his usual place of residence within a prescribed Zone, even though he is in Alice Springs for 183 days or more, Levi is unable to claim the ZTO.

Example 2.4

Angela is a doctor who works in Darwin Hospital Emergency Department. She flies into Darwin from Auckland, New Zealand and works on a regular rotational basis in Darwin Hospital. Usually, Angela works for ten days and then has a break of between eight and ten days, during which she travels back to Auckland to see her friends and family. Angela stays in accommodation provided for her by the hospital when she is in Darwin. She is purchasing a house in Auckland and she also has a car which she leaves at her Auckland home for use when she is there. She has bills sent to her Auckland home and she is registered to vote in New Zealand. Under the previous law, because Angela usually spent 183 days or more in Darwin, she claimed the ZTO. Under the new law Angela will no longer be eligible for ZTO because her usual place of residence is in Auckland.

Application and transitional provisions

2.14 The measure in this Schedule will apply from the 2015-16 year of income and later years of income. [Schedule 2, item 15]

Statement of Compatability with Human Rights

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

Better targeting of the Zone Tax Offset

2.15 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

2.16 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 to restrict the application of the Zone Tax Offset to people whose usual place of residence is within a Zone or a prescribed area within a Zone.

Human rights implications

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

Conclusion

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