Senate

Explanatory Memorandum

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

Chapter 3 - Family tax initiative

Overview

3.1 Schedule 3 of the Bill will make amendments to sections 23AF and 23AG of the Income Tax Assessment Act 1936 (the Act), which are consequential upon the introduction of family tax assistance. Other amendments in relation to family tax assistance are contained in the Income Tax Rates Amendment Bill (No. 1) 1997.

Summary of the amendments

Purpose of the amendments

3.2 The purpose of these amendments is to give taxpayers covered by sections 23AF and 23AG of the Act the proper amount of family tax assistance (FTA) entitlements.

Date of effect

3.3 1 January 1997.

Background to the legislation

3.4 The family tax initiative commenced on 1 January 1997. It has two components - FTA which is delivered through the tax system, usually in the form of an increase in the tax-free threshold; and family tax payments, which are cash payments delivered by the Department of Social Security.

3.5 The main provisions for FTA are contained in Division 5 of Part II of the Income Tax Rates Act 1986 (the Rates Act).

3.6 Broadly speaking, section 23AF of the Act exempts "eligible foreign remuneration" derived by a natural person from employment on an approved overseas project. To qualify for the exemption, a person must be an Australian resident and work on the approved project continuously for a period of at least 91 days.

3.7 Section 23AG of the Act exempts certain foreign earnings derived by a natural person from foreign service, when the person has been engaged in the foreign service for a continuous period of at least 91 days and is an Australian resident.

3.8 If section 23AF or 23AG applies to a taxpayer, the amount of tax payable on the taxpayer's other (non-exempt) taxable income is calculated according to formulae contained in subsections 23AF(17A) and 23AG(3) respectively. The formulae apply to the taxpayer's other taxable income, the rate that would have been the average rate of tax of the taxpayer if the foreign earnings were not exempt. The average rate is calculated as "notional gross tax" divided by "notional gross taxable income".

3.9 As the law stands, FTA is taken into account in the calculation of "notional gross tax". Allowing FTA at this point in the calculation means that taxpayers covered by sections 23AF and 23AG receive any FTA benefits at an average rate, instead of at the lowest marginal rate.

Explanation of the amendments

3.10 Items 1 and 2 of Schedule 4 will amend section 23AF of the Act. Items 3 and 4 will amend section 23AG. The amendments to each section will be identical.

3.11 Firstly, "notional gross tax" will be calculated on the basis that the taxpayer is not entitled to any FTA benefits . [Items 1 and 3]

3.12 Then, if the taxpayer would otherwise be eligible for FTA, the amount of tax payable will be reduced by an amount calculated according to the following formula:

tax-free threshold increase x lowest marginal rate


where:

•

"tax-free threshold increase" is the amount by which the taxpayer's threshold would have been increased under Division 5 of Part II of the Rates Act, if the taxpayer had been liable to tax at normal marginal rates; and

•

"lowest marginal rate", currently 20%, is the lowest rate in the table of marginal rates in clause 1, Part I, Schedule 7 to the Rates Act. [New subsections 23AF(17D), 23AF(17E), 23AG(5A) and 23AG(5B)]

3.13 For example, a qualifying taxpayer who had 2 dependent children both over 5 years old would normally be entitled to an increase in the tax-free threshold of $2,000. If the taxpayer fell within section 23AF or 23AG, the amount of tax payable by the taxpayer would be reduced by

$2,000 x 20%


i.e. $400. This is the same amount of benefit that the taxpayer would receive in respect of 2 dependent children, if the taxpayer paid tax at normal marginal rates.