SENATE

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 Tax rebate for low income aged persons

Overview

1.1 The amendments contained in Part 1 of Schedule 1 of the Bill will insert two new sections in the Income Tax Assessment Act 1936 (the Act) to provide a tax rebate for certain persons of age pension age who are not in receipt of the age pension.

Summary of the amendments

Purpose of the amendments

1.2 The proposed amendments will provide for a tax rebate for a taxpayer:

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of age pension age;

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not in receipt of the age pension;

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considered to be a resident for age pension purposes; and

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in receipt of taxable income below the relevant pensioner rebate cut-out thresholds.

Date of effect

1.3 The proposed rebate will apply for the 1996-97 income year and subsequent income years. For the 1996-97 income year the rebate will be available at half the levels of the pensioner rebate. For subsequent income years it will be available at the same levels as the pensioner rebate.

Background to the legislation

1.4 Section 160AAA of the Act provides for a tax rebate in respect of age pensions to offset the tax on an age pension where the pension is paid at the full rate for the full year. The rebate also allows the recipient of this pension to receive a certain amount of non-pension income without paying tax on it. This latter amount is equal to the amount of non-pension income a pensioner can receive without the pension being reduced and is referred to as the income test-free area.

1.5 The rebate is set for each income year at three levels: single, married and married but separated owing to illness or infirmity. The levels are ascertained in accordance with the Income Tax Regulations (the regulations).

1.6 Where the taxable income of a pensioner exceeds the rebate threshold which is generally equal to the sum of

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the pension; and

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the income-test free area

the rebate reduces in accordance with the regulations. The rate of reduction is 12.5 cents for every dollar of taxable income in excess of the rebate threshold.

1.7 For example, for the 1995-96 income year, the rebate threshold for a single pensioner is $11,185 and the rebate is $1,157. Where a pensioner receives taxable income in excess of the rebate threshold the rebate will reduce until it cuts out totally at a taxable income of $20,441. The point at which the rebate cuts out is referred to as the cut-out threshold.

1.8 Subject to phasing out of the pensioner rebate for taxable income in excess of the rebate threshold, an age pensioner is entitled to a pensioner rebate if he or she receives the age pension for as little as one day in an income year.

1.9 Where one member of a pensioner couple does not receive sufficient taxable income to require the use of all his/her rebate the unused portion can be transferred to the other member of the couple. Provision for the transfer is contained in the regulations.

1.10 A person may not receive an age pension although his/her taxable income is below the cut-out threshold relevant to the pensioner rebate because, for example, the person does not pass the assets test applicable to the age pension. Such a person does not at present qualify for the pensioner rebate, even though his/her taxable income may be the same as that of an age pensioner.

Explanation of the amendments

1.11 The amendments will insert a new section 160AAAA in the Act to provide for an income tax rebate for certain taxpayers of age pension age who do not receive the age pension. The amendments also insert a new section 160AAAB . New section 160AAAB mirrors new section 160AAAA except that it deals with a situation where the age pension age person is a presently entitled beneficiary of a trust estate and is under a legal disability. In such a case the trustee is assessed in respect of the person's trust income under section 98 of the Act. Such a trustee will be entitled to the new rebate when assessed under section 98 if the beneficiary would be entitled under the new section 160AAAA if the trust income were taken to be their only income. This is consistent with the provisions relating to other personal income tax rebates.

1.12 Subsections 160AAAA(1) and 160AAAB(1) will provide that the taxpayer will be entitled to a rebate of income tax if two conditions are satisfied. The amount of the rebate will be ascertained in accordance with the regulations. [Item 1]

1.13 The first condition will consist of three elements [subsections 160AAAA(2) and 160AAAB(2)] . The taxpayer or beneficiary must:

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attain age pension age (65 years for men, initially 60.5 years for women);

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meet the residential requirements for age pensioners;

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not be in gaol. [Item 1]

1.14 The elements of the first condition for the new rebate must apply for at least one day in the income year. This is consistent with the requirement that the pensioner rebate is available to a taxpayer who receives the age pension for at least one day in the income year. [Item 1]

1.15 New subsections 160AAAA(3) and 160AAAB(3) will provide that the second condition consists of two elements. The first element will require that the taxpayer's taxable income or the beneficiary's trust income assessed under section 98 of the Act ( new subsection 160AAAB(4) ) for the year of income be less than an amount ascertained in accordance with the regulations. This amount will be the cut-out threshold for the pensioner rebate and will vary with marital status and whether spouses are separated owing to ill-health. [Item 1]

1.16 The second element will require that the taxpayer or beneficiary is not entitled to a pensioner or beneficiary rebate. [Item 1]

1.17 New subsections 160AAAA(4) and 160AAAB(5) will provide that, for the purposes of qualifying for the rebate, the members of a couple are income tested jointly, ie. half their combined income each needs to be less than the amount ascertained in accordance with the regulations [item 1] . This is consistent with the joint income-testing for entitlement to an age pension and, effectively, for the pensioner rebate. Where new section 160AAAA applies, the relevant incomes to be tested are the taxable income of the taxpayer and the taxable income of the taxpayer's spouse (including any share of the net income of a trust estate to which the spouse is presently entitled and that is assessed under section 98 of the Act, even if this is the only income of the spouse). Where new section 160AAAB applies, the relevant incomes to be tested are the share of net income of the presently entitled beneficiary and the taxable income of the beneficiary's spouse (including any trust income assessed under section 98, even if this is the only income of the spouse).

1.18 New subsections 160AAAA(5) and 160AAAB(6) will provide for regulations made for the purposes of new sections 160AAAA and 160AAAB to be made retrospectively. This is necessary as the data used to calculate pensioner rebates and rebate thresholds will not be available for an income year until well into that income year, due to the indexing of age pensions. [Item 1]

1.19 Item 2 inserts a reference to the new rebate in the definition of 'qualifying rebates' in subsection 221YAB(1) of the Act. A reference to the new rebate under new section 160AAAB is not inserted because section 221YAB does not apply to trustees.

1.20 Section 221YAB provides a test by which taxpayers in receipt of salary or wage income are subjected to provisional tax. When such a taxpayer has an amount to pay on assessment of $3,000 or more that is directly referable to a shortfall in tax instalment deductions from the taxpayer's salary or wage income, the taxpayer becomes subject to provisional tax.

1.21 In calculating whether the amount to pay on assessment arises because of a shortfall of tax instalment deductions, certain rebates considered likely to recur to a taxpayer's benefit are taken into account.

1.22 Because it is possible that a taxpayer who receives the new rebate could receive salary or wage income, it is appropriate to take account of the new rebate in the test.

1.23 Subitem 5(1) provides that the rebate becomes available in taxpayers' 1996-97 assessments and is first used in calculating the shortfall test at the same time.

1.24 Items 3 and 4 insert references to the new rebate in the provisions of the Act concerned with the furnishing of taxpayer provisional tax estimates.

1.25 Section 221YDA allows a taxpayer who has been notified of provisional tax or an instalment of provisional tax to furnish his or her own estimate of certain amounts to the Commissioner and for the provisional tax to be recalculated accordingly.

1.26 Paragraph 221YDA(1)(da) provides that a taxpayer, in the expectation of being entitled to certain rebates in the taxpayer's next assessment, may make an estimate of them. Subparagraph 221YDA(2)(a)(ii) provides for the recalculation of the provisional tax based on the estimate.

1.27 It is possible that a taxpayer who receives the new rebate could be subject to provisional tax, and have had the new rebate taken into account in the calculation of provisional tax notified. Therefore it is appropriate to allow a taxpayer to make an estimate of the amount of rebate to which the taxpayer will be entitled, for the purpose of varying the provisional tax notified.

1.28 The amendments made by items 3 and 4 operate in respect of the 1996-97 and later years of income [subitem 5(2)] .

1.29 Taxpayers who have income subject to pay-as-you-earn tax instalment deductions will be able to vary those deductions under section 221D of the Act on the same basis as provisional taxpayers.