House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

Chapter 2 - Primary producer income averaging

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to allow primary producers to access income tax averaging 10 income years after choosing to opt out, instead of that choice being permanent.

2.2 This assists primary producers as averaging only recommences when it is to their benefit (they receive a tax offset) and they can still opt out if averaging no longer suits their circumstances.

Context of amendments

2.3 Income tax averaging smooths out the income tax liability of eligible individuals from year to year. Broadly, this is achieved by providing a tax offset to a taxpayer where their income is higher than average or requiring them to pay extra income tax where their income is lower than average.

2.4 For tax averaging to apply to an individual taxpayer they must satisfy the following basic conditions:

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be carrying on a primary production business for two or more income years in a row; and

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for at least one of those income years, have a basic taxable income that is less than or equal to basic taxable income in the next income year.

2.5 Primary producers may choose to opt out of the averaging rules, but if they do so, this choice applies permanently.

2.6 If primary producers face a permanent reduction of income for retirement or other reasons, they can choose to discontinue and re-start averaging from a fresh 'year 1' in line with the averaging rules.

Summary of new law

2.7 This Schedule amends the law so that primary producers can re-access the benefits of income tax averaging 10 income years after opting out. If a primary producer wants to opt out again, they may still do so, but that choice to opt out is effective for 10 income years.

Comparison of key features of new law and current law

Detailed explanation of new law

2.8 The amendments replace the permanent choice to opt out of income tax averaging with a choice which is effective for 10 income years. [Schedule 2, item 3, subsection 392-25(1)]

2.9 After the 10 year opt-out period has ended, primary producers are effectively treated as new primary producers in applying the basic conditions. [Schedule 2, item 2, subsection 392-10(3); note to subsection 392-10(3)]

2.10 The averaging adjustment applies again to a taxpayer's assessment where the following conditions are satisfied:

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income tax averaging has not applied to the taxpayer because they permanently opted out 10 or more income years ago;

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the taxpayer is carrying on a primary production business for two income years in a row; and

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their basic taxable income in the first year (after the 10 year opt-out period has passed) is less than or equal to their basic taxable income in the later year.

2.11 If these basic conditions are not met, an averaging adjustment will not be made until they are met in a later income year.

Table 2.1 : Explanation of the amendments using the 2016-17 income year as an example

2.12 This table shows how the measure works for primary producers who permanently opted out of income averaging in 2006-07 (or any previous income year).

2.13 The 10 year waiting period illustrated above applies to primary producers who opted out in any subsequent income years.

Example 2.1: Primary producer who opted out less than 10 years ago

Amy, an orchardist, opted out of the averaging regime in 2009-10. Under the existing law, her choice to opt out was permanent. Under the new law, Amy is eligible to re-access income tax averaging in the 2019-20 income year when 10 income years have passed. If she runs a primary production business for two years in a row (after the 10 year opt-out period) and the second year of which her basic taxable income is more or equal to the first year, she is eligible for a tax offset.

If Amy has no change in her basic taxable income, no tax offset is payable because her average income is the same as her basic taxable income in each year. If she earns more in year 2, a tax offset is payable.

This means the first year Amy is eligible for a possible tax offset under the averaging rules is the 2020-21 income year.

2.14 In applying the basic conditions after the 10 year opt-out period has passed, none of the years in the opt-out period can be counted for the purposes of income tax averaging. [ Schedule 2, item 2, subsection 392-10(3)]

Example 2.2: Income years in the opt-out period are not averaged once opt-out period has ended

It is now the 2016-17 income year. Christine opted out of averaging in 2006-07 and ceased primary production activities for several years commencing in 2010-11. Christine was carrying on a primary production business in both the 2015-16 and 2016-17 income years. Further, her basic taxable income for 2015-16 was less than her basic taxable income in the current year (2016-17).

Whilst the amendments apply from the 2016-17 income year, Christine is not eligible for a tax offset until the 2017-18 income year. The measure takes past years into account for the purposes of working out the 10 income year exclusion period, but it does not operate retrospectively.

Upon re-accessing income tax averaging, none of the income years which are subject to the 10 year opt-out period can be taken into account when applying section 392-10.

Accordingly, the first year of the two year eligibility period under section 392-10 is the 2016-17 income year, and not the 2015-16 income year (or any prior year) which fall within the 10 year opt-out period.

2.15 Taxpayers who opted out of the averaging rules prior to the 2006-07 income year may re-access income tax averaging as 10 income years or more have passed since they opted out. [Schedule 2, item 3, subsection 392-25(1)]

Example 2.3: Primary producer who opted out more than 10 years ago

Max is a wool grower who opted out of income tax averaging in the 2002-03 income year. Max leased the farm to another operator and moved into a town for work. Now the farm is productive again and the lease has expired.

Max has decided to farm sheep for wool production again. For the 2016-17 income year, he makes a reasonable profit. For the 2017-18 income year, he continues to run a primary production business and his basic taxable income is more than in the 2016-17 income year.

Under the existing law, Max could not benefit from income tax averaging as he opted out and that had permanent effect. As a result of these changes, when he lodges his income tax return for 2017-18, the Commissioner of Taxation applies income tax averaging again, and Max receives a tax offset.

2.16 Primary producers may still opt out where it does not suit their circumstances, and where they do so the choice applies for 10 income years. [Schedule 2, item 3, subsection 392-25(1)]

Example 2.4: Primary producer who is eligible to automatically re-access averaging but does not want to

Mirabel opted out of income tax averaging for the 2003-04 income year. It is now the 2017-18 income year and she has been operating a primary production business for 2016-17 and 2017-18 and earned more basic taxable income in the latter year than in the former.

Although she is eligible for a tax offset, this does not suit her circumstances so she makes a choice not to access averaging for the 2017-18 income year by opting out again. The choice is effective for the next 10 income years and the next time she is eligible for an automatic tax offset, if the standard conditions are met, is the 2028-29 income year.

2.17 If taxpayers have opted out and wish to extend the opt-out period, this decision is valid for the subsequent 10 years. They cannot extend the opt-out period to, say, 15 years by making a further choice to opt out when they are still in the initial 10 income year opt-out period. [Schedule 2, item 3, subsection 392-25(1A)]

Example 2.5: Taxpayers cannot extend the opt-out period while within it

Michelle opted out of income averaging for the 2013-14 income year. It is now the 2018-19 income year. Michelle decides she does not want to have her income tax liability averaged until another 10 years have passed. However, she cannot make another choice to opt out until averaging is again available in 2023-24. She cannot opt out for another 10 years from 2018-19 because she is already in a 10 year opt-out period.

Consequential amendments

2.18 The amendments update subsection 392-5(6) to reflect that the choice not to have an income tax liability adjusted under Division 392 is effective for 10 income years, rather than for life. [Schedule 2, item 1, subsection 392-5(6)]

Application and transitional provisions

2.19 The amendments apply for the 2016-17 income year and later income years. [Schedule 2, item 5]

2.20 This Schedule applies prospectively, with the first possible averaging year being the 2016-17 income year and the benefit of the tax offset being available from the 2017-18 income year (at the earliest). [Schedule 2, item 2, subsection 392-10(3); note to subsection 392-10(3)]

2.21 Although the measure applies for the 2016-17 income year and later income years, the tax offset will not be available until the second year after commencement because income from two income years must be averaged in order for the Commissioner of Taxation to pay an averaging tax offset.

2.22 Primary producers must have opted out from averaging in the 2006-07 income year or any previous year in order for the benefit of averaging to apply to the 2017-18 income year (at the earliest).

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Primary producer income averaging

2.23 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

2.24 This Schedule amends the ITAA 1997 to allow primary producers to access income tax averaging 10 income years after choosing to opt out, instead of that choice being permanent.

2.25 This Schedule benefits primary producers as averaging only recommences when it is to their benefit (they receive a tax offset). It allows a primary producer to opt out again if averaging no longer suits their circumstances.

Human rights implications

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

Conclusion

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