Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

CHAPTER 4 - SOCIAL SECURITY PAYMENTS

4.1 This Chapter explains the consequential amendments to the Income Tax Assessment Act 1936 (the Act) required as a result of the Social Security (Home Child Care and Partner Allowances) Legislation Amendment Act 1993 . Section 1 deals with the home child care allowance and section 2 covers the partner allowance.

Section 1 - Home child care allowance and dependant rebate

Overview

4.2 The Bill contains the amendments to the Act which are necessary to complement the payment of the new 'home child care allowance' for couples with dependent children. The new allowance will be paid by the Department of Social Security to the dependent spouse from 29September 1994.

Summary of the amendments

Purpose of the amendments

4.3 The amendments will:

•

exempt home child care allowance payments from income tax;

•

remove a taxpayer's entitlement to the dependent spouse rebate where the taxpayer's spouse qualifies for the home child care allowance;

•

exclude the home child care allowance from separate net income and alter the separate net income test for partial rebate entitlements;

•

make necessary consequential amendments to the current zone rebates and rebates for members of the defence forces serving overseas and United Nations armed forces. These amendments are necessary to ensure that these taxpayers are not disadvantaged by the abolition of the with child dependent spouse rebate; and

•

make consequential amendments to the provisional tax provisions. [Clause 51]

Date of effect

4.4 The amendments will apply as follows:

•

the amendments to exempt the home child care allowance from income tax will apply to payments made on or after 29September 1994 [subclause 58(1)] ;

•

the amendments to the rebate entitlements, including the separate net income test amendments, will apply to assessments for the 1994-95 and later years of income [subclause58(2)] ;

•

the transitional amendments to the rebate entitlements will apply to assessments for the 1994-95 year of income [clause60] ;

•

the consequential amendments to the provisional tax provisions will apply to the calculation of provisional tax (including instalments) for the 1994-95 and later years of income [clause58] .

Background to the legislation

4.5 The Government announced in the 1993-94 Budget that the "with child" dependent spouse rebate would be abolished and replaced with the home child care allowance. The new allowance will be paid through the social security system commencing from 29 September 1994. As a result, the Act requires complementary amendment to accommodate the introduction of the home child care allowance.

Explanation of the amendments

4.6 As some terms are used frequently throughout this chapter, the following abbreviations are made. The relevant income tax provision is also shown:

HCCA Home child care allowance [Social Security legislation]

DSRD With child/student dependent spouse rebate [subsection159J(1B)]

DSR Without child dependent spouse rebate [subsection 159J(1)]

SNI Separate net income [subsection 159J(6)]

Exemption of HCCA payments from income tax

4.7 The amendments will exempt HCCA payments from income tax by introducing new section 24ABXA into the exemption provisions in Division1AA of Part III of the Income Tax Assessment Act 1936 . Those provisions detail which Social Security allowances and pensions are exempt from tax. [Clauses 53 and 54]

Rebates for dependants

4.8 A taxpayer's entitlement to the DSRD is currently obtained through subsection 159J(1B). This is achieved by increasing the DSR entitlement under subsection 159J(1) by an additional amount when the taxpayer has a dependent child or student. The respective DSR and DSRD amounts for the 1993-94 year are $1188 and $1425. The amendments remove a taxpayer's entitlement to the DSRD by ceasing the operation of subsection 159J(1B) in respect of a dependent spouse [paragraph (a) of clause 57] . The amendments also remove a taxpayer's entitlement to the DSR if the taxpayer's dependent spouse qualifies for the HCCA. This is achieved by introducing a new definition of a "non-HCCA spouse" for rebate purposes [paragraphs (b) and (h) of clause 57] . This will be the case even where a spouse qualifies for the HCCA but is not entitled to payment. For example, under the HCCA legislation, a dependent spouse may not be entitled to HCCA payments because of:

•

income received; or

•

someone else receiving HCCA payments for the same child; or

•

the dependent spouse's partner is already receiving HCCA payments.

The income test is similar to the current legislation where the taxpayer would also be denied a DSRD because of the SNI test applied to the spouse's income.

4.9 Apart from the transitional 1994-95 year, there will be situations where there is a mix of DSR entitlement and HCCA qualification in a year of income because the dependent spouse does not qualify for the HCCA for the entire year. For example, HCCA will cease when a child completes secondary school during the year of income or HCCA will commence when a child is born during the year of income. The practical application of this will be an extension of the present arrangements [subsection 159J(3)] which will enable the Commissioner to pro-rata the full year amount of rebate to a partial rebate for the part of the year in which the taxpayer's dependent spouse does not qualify for the HCCA. [Paragraph (c) of clause 57]

4.10 Where the taxpayer has more than one dependent spouse the current legislation [subsection 159J(5A)] provides for the taxpayer to be entitled to the lesser of the rebate entitlements. Consistent with this approach, new subsection 159J(3B) will prevent any DSR entitlement if any of the dependent spouses qualify for the HCCA during the whole or part of the year of income. [Paragraph (d) of clause 57]

Separate net income - Partial rebates

4.11 The income test applied to HCCA recipients will incorporate a $282 annual income threshold as contained in subsection 159J(4) for the purposes of reducing DSR or DSRD entitlements where the taxpayer's spouse has SNI. Partial rebates under the new arrangements, where there is only DSR or a mix of DSR and HCCA entitlements, will therefore require the $282 threshold to be available on a pro-rata basis.

4.12 The existing arrangements consider the dependent spouse's SNI in respect of the part of the year in which the taxpayer is entitled to receive the DSR. With the introduction of HCCA, it will be necessary to reduce the $282 threshold to the amount which bears the same proportion to that threshold as the part of the year in which there is entitlement to the DSR bears to the full year [paragraphs (e) and (f) of clause 57 and new subsection 156J(4A)]. For example, without this restriction, a couple whose first child was born on 1/1/95 would receive the full $282 threshold for the taxpayer's entitlement to the DSR for the first six months. At the same time, the spouse's entitlement to HCCA for the remaining six months would be subject to a pro-rated test free area of $141.

HCCA excluded from SNI

4.13 Home child care allowance payments will be excluded from SNI by the amendments as it would be inappropriate to reduce the amount of a partial DSR by any HCCA payments received in the same year [paragraph (g) of clause 57] . Because the HCCA replaces the DSR, such a reduction would be akin to reducing part of the DSR because of the receipt of the remaining part of the DSR before the amendments.

Income of certain persons serving with an armed force under the control of the United Nations, rebates for residents of isolated areas and rebates for members of Defence Force serving overseas

4.14 The amendments made by this Bill will not affect the amounts allowed by the additional rebates that are currently available for taxpayers:

•

living in an isolated areas of Australia (zone rebates) [section 79A];

•

serving overseas in the defence forces [section 79B]; or

•

serving with a United Nations armed force [section 23AB];

who would have been entitled to the DSRD but for its removal. [Clauses 52, 55 and 56]

4.15 These rebate calculations include a fixed dollar amount plus a percentage of the taxpayer's dependent rebate entitlements. Taxpayers who would have been entitled to the DSRD, but for these amendments, will now use a notional DSRD in the calculation of the dependent rebate entitlements for 1994-95 and subsequent years of income. [Subclause 59(2)]

4.16 This approach is consistent with that currently adopted for allowing notional rebates for children in the calculation of the dependent rebate entitlements. The calculation of these zone and related rebates will also ensure that taxpayers who are currently entitled to the DSRD and do not qualify for the HCCA, are not disadvantaged. For example, a taxpayer with a dependent spouse and dependent student (aged 20 years) will now be entitled to the DSR rather than the DSRD under the existing arrangements. This taxpayer will use a notional DSRD entitlement rather than the actual DSR entitlement in the calculation of dependent rebate entitlements for zone, and the other rebates referred to in paragraph 14.

4.17 The provisions where the notional DSRD rebate entitlement is used in the calculation of these rebates are as follows:

•

the "relevant rebate amount" in subsection 79A(4) [clause55] ;and

•

subparagraphs 23AB(7)(a)(ii) [clause 52] and 79B(2)(a)(ii), paragraph 79B(4)(b) and subparagraph 79B(4A)(b)(ii) [clause56] .

Uplifted provisional tax amount

4.18 Provisional tax is calculated for a year of income by deducting "qualifying reductions" from the tax estimated on the uplifted preceding year's income [Subsection 221YCAA(1)]. The "qualifying reductions" include an allowance for "location rebates" [paragraph 221YCAA(2)(n)] that the taxpayer was entitled to in his or her assessment for the preceding year of income. The location rebates include rebates for:

•

persons serving with an armed force under the control of the United Nations; or

•

residents of isolated areas; or

•

members of the defence forces serving overseas.

4.19 If the preceding year's location rebate included a component representing dependent rebate entitlements (see paragraphs 14 to 17 above), the provisional tax provisions cause the qualifying reduction in respect of the location rebate to be increased. The qualifying reduction is increased by 20% of the indexation increase (under section 159HA) in the amount of the concessional rebates for the current year [subparagraph 221YCAA(2)(n)(i)].

4.20 The amendments ensure that a taxpayer who would have been entitled to the DSRD has the qualifying reduction in respect of their location rebate calculated with reference to the appropriate notional DSRD or actual DSR as discussed above. [Paragraph(a) of clause 58]

4.21 The provisional tax arrangements for a taxpayer who claimed a DSR or DSRD currently have regard to the appropriate indexation (under section 159HA) of that rebate amount for the provisional income year. Because of the abolition of the DSRD, the provisional tax amendments in the Bill, which need to reflect how provisional tax will be calculated for 1994-95 and later years of income, alter the current arrangement specifically in respect of a taxpayer who is entitled to the DSRD in their 1993-94 assessment. [Paragraphs (b) and (c) of clause 58 and new paragraph 221YCAA(2)(pa)]

4.22 New paragraph 221YCAA(2)(pa) will provide that a taxpayer who is entitled to a DSRD in their 1993-94 assessment will be allowed a qualifying reduction of one quarter of the DSRD amount (as indexed by section 159HA) for the purposes of their 1994-95 provisional tax calculation.

4.23 This approach may not reflect the appropriate qualifying reduction for all taxpayers. For example, where a taxpayer would have previously qualified for the DSRD because the youngest dependant was a 20 year old student, the taxpayer's spouse will not qualify for the HCCA from 29 September 1994. In this case, the taxpayer's spouse rebate claim for 1994-95 (approximately 1/4 DSRD plus 3/4 DSR) will potentially be higher than the 1/4 DSRD allowed for in the 1994-95 provisional tax calculation. The same applies in any other case of HCCA disqualification for a taxpayer who is entitled to the DSRD in their 1993-94 tax return. These taxpayers will be able to lodge a provisional tax variation [section 221YDA] to reduce the provisional tax calculated if necessary.

Transitional 1994-95 year

4.24 Because payments of HCCA commence from 29 September 1994, the amendments need to reflect the arrangements to apply for assessments for the 1994-95 transitional year. In the transitional year, a taxpayer, who would have been entitled to the DSRD but for its abolition, will be entitled to a:

(i)

DSRD (for the period to 28 September 1994); plus

(ii)

DSR for the period from 29 September 1994 when the taxpayer's spouse does not qualify for the HCCA. [Subclause 60(1)]

The application of the transitional year formula to a taxpayer entitled to the DSR (being a taxpayer with a dependent spouse and no dependent children or students) will result in the same entitlement as before the amendments.

4.25 The amendments also expressly prevent a taxpayer, who would not have been entitled to a DSRD or DSR in their 1994-95 assessment, from being entitled to a rebate in the transitional year. [Sub clause 60(4)]

4.26 The DSR and notional DSRD entitlements for the 1994-95 will be $1211 and $1452 respectively. These amounts represent the 1993-94 amounts of $1188 and $1425 referred to in paragraph 8 above as indexed by the application of section 159HA. Under the amendments proposed, the maximum dependent spouse rebate entitlement (for a taxpayer with a dependent student whose age does not entitle the taxpayer's spouse to receive the HCCA) for the 1994-95 transitional year will be:

(i)

for the period from 1 July 1994 to 28 September 1994, a maximum DSRD of $358 (90/365 * $1452) reduced by $1 for every $4 by which the spouse's SNI derived in that period exceeds $70 (90/365 * 282) ["Pre-29 Sep component (old law)" in clause 60] plus;

(ii)

for the period from 29 September 1994 to 30 June 1995, a maximum DSR of $912 (275/365 * 1211) reduced accordingly for the spouse's SNI derived in that period which exceeds $212 (275/365 * 282) ["Post-28 Sep component (new law)" in clause60]

The maximum entitlement for taxpayer, who is entitled to the DSRD and whose dependent spouse qualifies for HCCA from 29 September 1994, will be the DSRD shown in (i) above.

4.27 The following examples illustrate in more detail the application of the amendments in clause 60 of the Bill for the transitional year:

Examples of calculation of rebate entitlements where there is a mix of DSR/HCCA during the year of income (rebate and HCCA amounts to nearest $).

Example 1

A taxpayer has a dependent spouse and child during 1994-95. HCCA payments are made from 29September 1994. The spouse's SNI, and income for HCCA purposes, is $3120 ($60/wk) earned evenly throughout the year.

Present arrangements

The taxpayer would be entitled to a DSRD of $743. This amount is obtained by reducing the 1994-95 notional DSRD of $1452 by $709. The reduction of $709 is obtained by applying the $1 for $4 SNI test [(3120-282)/4=709].

Proposed arrangements

For the period to 28 September 1994 the DSRD to be claimed is equal to $181. This amount is obtained by reducing the DSRD of $358 [see paragraph 26(i) above) by $177. The reduction of $177 is obtained by applying the $1 for $4 SNI test [(780-70)/4 = 177]. The $780 SNI represents the $60 per week for 13 weeks to 28 September 1994. In addition to the part year DSRD claim, the taxpayer's spouse will receive $654 in 20 fortnightly HCCA payments of $32.70.

The total of DSRD and HCCA under the proposed arrangements would be $835 ($181 + $654). This is compared to the DSRD of $743 that would have been the rebate entitlement under the present arrangements.

Example 2

The same taxpayer as in Example 1 with the taxpayer's spouse's SNI, and income for HCCA purposes, being $3120 ($120/wk) earned evenly for 26 weeks from 1 January 1995.

Present arrangements

The taxpayer would be entitled to a DSRD of $743 as in example 1 above. As the taxpayer is married for the full year, the taxpayer is regarded as maintaining a spouse for the whole year.

Proposed arrangements

For the period to 28 September 1994 the DSRD to be claimed would be $358. This amount represents the pro-rated 1994-95 DSRD referred to above. This rebate will not be reduced, as in example 1, because the spouse's SNI to 28 September 1994 is nil. In addition, the taxpayer's spouse will receive $420 in 7 fortnightly HCCA payments of $60 (from 29 September 94 to 31 December 94) plus $35 in 13 fortnightly HCCA payments of $2.70 (from 1 January to 30 June 95). The reduced HCCA payments for the 13 fortnights from 1 January 1995 reflect the spouse's income of $120/wk during the period.

The total of DSRD and HCCA under the proposed arrangements would be $813 ($358 + $455). This is compared to the DSRD of $743 under the present arrangements.

Example 3

A taxpayer with a dependent spouse and child for 1994-95. HCCA payments commence from 29September 1994. Spouse's SNI, and income for HCCA purposes, is $6240 (120/wk) earned evenly throughout the year.

Present arrangements

DSRD entitlement is nil because the spouse's SNI exceeds the limit of $6090 at which the DSRD of $1452 is reduced to nil by application of the $1 for $4 SNI test for SNI in excess of $282.

Proposed arrangements

No DSRD since the taxpayer would not have been eligible for DSRD before the amendments [subclause 60(4)] . The taxpayer's spouse will receive $54 in 20 fortnightly HCCA payments of $2.70 (from 29September 94 to 30 June 95).

Example 4

A taxpayer with a dependent spouse and child for 1994-95. HCCA payments commence from 29September 1994. Spouse's SNI, and income for HCCA purposes, is $6240 (240/wk) earned evenly for 26 weeks from 1 January 1995.

Present arrangements

No DSRD to be claimed as explained in example 3.

Proposed arrangements

No DSRD as in example 3 by the application of subclause 60(4) . The taxpayer's spouse will receive $420 in 7 fortnightly HCCA payments of $60 from 29 September 94 to 31 December 94.

Section 2 - Partner allowance

Overview

4.28 The Bill will provide for the same tax treatment to be given to the partner allowance paid under the Social Security Act 1991 as exists for other comparable social security allowances.

Summary of the amendments

Purpose of the amendments

4.29 The amendments will provide for:

•

payments of the partner allowance to be given the same tax treatment as for other comparable social security allowances; and

•

an exemption from income tax for partner allowance bereavement payments in the same way as for other social security allowances.

Date of effect

4.30 The amendments apply to payments received on or after 29 September 1994. [Clause94]

Background to the legislation

Tax treatment of basic social security pensions, allowances and benefits

4.31 As a complementary measure to the introduction of the home child care allowance (HCCA) and the removal of the dependent spouse rebate, the Government has decided that a recipient of a job search, newstart and sickness allowance or special benefit will no longer have their allowance or benefit increased because of having a dependent partner.

4.32 Instead, as from 29 September 1994, these recipients will be paid at about half the married-rate and the partner will be eligible for an allowance at the same rate. The new allowance is to be known as the partner allowance.

4.33 The partner allowance will receive similar tax treatment to the comparable allowances and benefits received by the other partner.

4.34 Division 1AA of Part III of the Income Tax Assessment Act 1936 (the Act) provides for the tax treatment of social security pensions, allowances and benefits. In particular circumstances, the Division exempts some basic pensions and allowances from income tax.

4.35 In other circumstances the Division provides for certain of these basic payments to be taxable, in particular the basic payments of the job search, newstart and sickness allowances and special benefit. Where they are taxable, section 160AAA of the Act provides for pensioner and beneficiary rebates. These rebates extinguish the tax on:

(a)

pensions plus non-pension income up to the income test free area; and

(b)

allowances and benefits.

The rebates are reduced where there is further taxable income.

Tax treatment of supplementary amounts

4.36 Under Division 1AA, supplementary amounts such as rent assistance are exempt from income tax. Supplementary amounts are set out in subsection 24ABA(1) of the Act.

Tax treatment of bereavement payments

4.37 Bereavement payments may be payable following the death of a social security pensioner, allowee or beneficiary or a person associated with such a person, for example, a partner. The purpose of the payments is to provide financial assistance over a period of fourteen weeks following the date of the death, referred to as the "bereavement period" .

4.38 The following diagram shows the bereavement period and points relating to bereavement payments and their tax treatment. The significant points on the diagram are:

bereavement notification day - the day on which the Department of Social Security (DSS) becomes aware of the death.

first available bereavement adjustment payday (FABAP) - the first payday after the bereavement notification day for which it is practicable to terminate or adjust payments under the Social Security Act 1991 .

4.39 The first available bereavement adjustment payday effectively divides the bereavement period into two periods:

bereavement rate continuation period (BRCP) to which continued payments relate; it ends before the first FABAP unless the FABAP occurs on or after the last day of the bereavement period; where the latter occurs, BRCP coincides with the bereavement period.

bereavement lump sum period in relation to which a bereavement lump sum may be payable; it begins on the first available bereavement adjustment payday and ends on the last day of the bereavement period.

4.40 In broad terms, the two modes of payment that the existing tax treatment of bereavement payments encompasses and which should be applicable to the new partner allowance are:

continued payment where, following the date of death, the surviving partner is entitled to a payment on each of the paydays in the BRCP at the rate at which the deceased would have received payment if the death had not occurred; this payment is exempt from income tax.

bereavement lump sum payment , where a bereavement lump sum is payable to the surviving partner, taking into account the continued payments (if any) to which the surviving partner is entitled before the FABAP. All or a proportion of a bereavement lump sum may be exempt from tax. The Exempt Bereavement Calculator AB (as set out in section 24ABZD of the Act) provides the steps to determine the "tax-free amount". Where the tax-free amount is less than the lump sum payment the difference is taxable. Where the tax-free amount is equal to or greater than the lump sum payment the latter is exempt from income tax. Where the tax-free amount exceeds the lump sum payment the excess may be set off against other social security payments received during the bereavement period and which are assessable.

Explanation of the amendments

Basic payments

4.41 Partner allowance basic payments, which are all payments other than supplementary payments, will be taxable under new paragraph 24ABPA(1)(b) of the Act [clause93] . However, the proposed amendment of section 160AAA of the Act will extend the beneficiary rebate to recipients of the partner allowance [clause 90] . The Income Tax Regulations will ensure that the rebate will be sufficient to extinguish the tax on the partner allowance paid at the full rate for a full income year.

Supplementary amounts

4.42 Supplementary amounts, such as rent assistance, to which recipients of the partner allowance are entitled, will be exempt from income tax under new paragraph 24ABPA(1)(a) of the Act. [Clause 93]

Bereavement payments

4.43 The Bill proposes to extend the existing tax treatment of bereavement payments to recipients of the partner allowance.

Continued payment

4.44 During the BRCP (see above diagram), the surviving partner is entitled to a continued payment equal to that which the deceased partner would have received on each payday before the next available adjustment payday. The amendments will make these payments exempt from income tax under new subsection 24ABPA(2) of the Act. [Clause93]

Example

4.45 A, a long term newstart allowee, receives a fortnightly payment of $260. His wife, B, receives partner allowance payments of $260 fortnightly. B dies. A notifies the Department of Social Security of the death two weeks after the date of death. There is one payday in the BRCP and the second payday in the bereavement period will be the first available bereavement adjustment payday. A will be entitled to $260 continued payment in relation to the BRCP. This amount is exempt from income tax. At the same time, in addition, the surviving partner, A, will continue to be entitled to the allowance at his or her pre-bereavement rate. This is not a bereavement payment. It will be assessable but subject to the beneficiary rebate under section 160AAA of the Act.

Bereavement lump sum payment

4.46 The amendments provide that the part of a bereavement lump sum payment that does not exceed the "tax-free amount" is to be exempt from income tax under new paragraph 24ABPA(3)(a) of the Act. The Exempt Bereavement Payment Calculator AB (Calculator AB) in section 24ABZD of the Act will determine the tax-free amount relating to any bereavement lump sum payment. [Clause 93]

4.47 In Step 1 of Calculator AB, the only exempt payments will be supplementary amounts such as rent assistance.

4.48 In Step 2, where the recipient of the partner allowance dies, the notional amount for the partner will be that which the deceased would have received if the deceased had not died.

4.49 In Step 3, add the amounts determined by steps 1 and 2 to arrive at the tax-free amount.

4.50 During the bereavement lump sum period, the surviving partner will be entitled to the allowance at the higher single rate. This will be assessable. It is not a bereavement payment but a normal payment of allowance or benefit and is subject to the beneficiary rebate under section 160AAA of the Act.

Example

4.51 From the previous example, A is a newstart allowee whose partner, B, is a partner allowee. B dies. There are six paydays in the bereavement lump sum period. During the bereavement lump sum period the allowance is payable to the surviving partner at the single rate of $281 per fortnight. This amount will be assessable but subject to the beneficiary rebate under section 160AAA of the Act. A receives a lump sum payment of $1,434 [($520 - $281) x 6].

4.52 Calculator AB applies as follows:

Step 1: The amount that would have been derived by B during the bereavement lump sum period was not exempt. The notional amount for the partner is nil.

Step 2: If she had not died, B would have derived $1,560 ($260 x 6) during the bereavement lump sum period. This is the notional amount for the partner.

Step 3: The tax-free amount is $1,560.

4.53 The lump sum payment of $1,434 is exempt and there is a further $126 ($1,560 - $1,434) to set off against any income A receives during the bereavement lump sum period.

4.54 However, any excess of such taxable social security income received during the bereavement period over the "tax free amount" will not be exempt from income tax - new paragraph 24ABPA(3)(b) . [Clause93]

Summary of the tax treatment of the partner allowance

4.55 The following table summarises the tax treatment of the new partner allowance:

4.56 The treatment of bereavement payments in relation to the partner allowance will be exactly the same as for the job search, newstart and sickness allowance and special benefit where both partners are recipients of the allowance or benefit.