Senate

Explanatory Memorandum

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

Chapter 10 - Savings tax offset (Savings rebate)

Overview

10.1 The amendments contained in Schedule 10 provide for a new tax offset (commonly known as the savings rebate ) for resident individuals in respect of savings and investment income and undeducted superannuation contributions.

Summary of the amendments

Purpose of the amendments

10.2 The amendments insert new Subdivision 61-A into the Income Tax Assessment Act 1997 (ITAA97) to provide the savings tax offset. The offset will apply at a rate of 15% (7.5% in 1998-99 assessments) to undeducted superannuation contributions made by employees and the self-employed and net personal income from savings and investment (including net business income) up to an annual cap of $3,000. [Item 4]

Date of effect

10.3 The amendments will apply to superannuation contributions and savings and investment income from 1 July 1998, the offset first being claimed in 1998-99 assessments. [Item 14]

Background to the legislation

10.4 In the 1997 Budget, the Government announced a package of measures designed to encourage private saving and enhance Australia's retirement income system. Part of that package was the introduction of a broadly based savings offset through the tax system, designed to provide assistance for individual taxpayers who save or invest and encourage potential savers or investors.

Explanation of the amendments

The following explanation is structured as follows:

1. The savings tax offset

2. Savings and investment income

3. Deductions relating to savings and investment

4. Superannuation contributions

5. Netting of savings and investment income and superannuation contributions.

6. Trustees

7. Claiming the offset

8. Technical issues

9. Example of savings tax offset

1. The savings tax offset

10.5 An individual taxpayer who is a resident at any time during the year of income will be entitled to a tax offset of 15% of:

the sum of his or her

•

savings and investment income; and

•

personal contributions to a complying superannuation fund or RSA

less

•

their deductions which relate to savings and investment income; and

•

their deductions under section 82AAT of the Income Tax Assessment Act 1936 (ITAA36) for superannuation contributions.

The maximum tax offset for a year is $450. [Item 4, new section 61-55]

10.6 For the first income year the offset is available (1998-99 income year), the offset is calculated as 7.5% of the amount determined above, giving a maximum rebate in that year of $225. [Subitems 15(1) and (2)]

2. Savings and investment income

10.7 Savings and investment income is, broadly, all assessable income other than salary or wages as defined in subsection 221A(1) of the ITAA36.

10.8 There are two main exceptions.

10.9 Firstly, some amounts of salary or wages are counted for the purposes of the offset. These are:

•

certain amounts paid as superannuation pensions or annuities; and

•

eligible termination payments. [Item 4, new section 61-60]

10.10 In relation to pensions and annuities a distinction is drawn between those from Australian sources and foreign sources:

•

all Australian sourced pensions and annuities, other than social security pensions, are counted as savings and investment income. Social security pensions are principally those which may qualify the recipient for a pensioner or beneficiary rebate under section 160AAA of the ITAA36 [item 4, new subparagraph 61-60(1)(b)(i)] .

•

in the case of foreign pensions, only those for which the recipient is, or has been, entitled to a deduction for the undeducted purchase price of the pension are counted as savings and investment income [item 4, new subparagraph 61-60(1)(b)(ii)] . This is a relatively simple way of distinguishing between pensions which the recipient has at least partly funded, as opposed to solely government provided pensions.

10.11 All assessable amounts of eligible termination payments (ETPs) qualify as savings and investment income. This is because ETPs generally arise from the same kind of savings behaviour as give rise to pensions and annuities, which also count as savings and investment income. [Item 4, new paragraph 61-60(1)(c)]

10.12 The second main exception to the broad rule in paragraph 10.7 above, is that some amounts of non-salary or wage income are not counted for the purposes of the offset. These are:

•

remuneration and allowances paid to members of local governing bodies [item 4, new paragraph 61-60(2)(a)] ; and

•

assessable reimbursements of deductible amounts paid in respect of:

-

tax-related expenses; and

-

election expenses.

[Item 4, new paragraphs 61-60(2)(b) and (c)]

10.13 Payments to members of local governing bodies are in the nature of salary or wages, even though they are normally excluded from the definition of salary or wages. The assessable reimbursements referred to above do not relate to savings and investment.

3. Deductions relating to savings and investment income

10.14 Only deductions which relate to savings and investment income are deducted in determining the offset [item 4, new subsection 61-55(2) Step 3 in the Method statement] . Deductions that are not related to any particular amount of savings and investment income are not deducted [item 4, new subsection 61-55(4)] . This would mean, for example, that the following deductions would not be subtracted from savings and investment income:

•

gifts;

•

tax-related expenses;

•

carried forward losses;

•

superannuation contributions (but see paragraph 10.17 below).

4. Superannuation contributions

10.15 All personal contributions made by a taxpayer to a complying superannuation fund or a retirement savings account (RSA) are also taken into account in calculating the offset [item 4, new subsection 61-55(2) Step 2 in the Method statement] . The contributions will qualify notwithstanding that the taxpayer may also qualify for a rebate for the contributions under section 159SZ of the ITAA36. A taxpayer's entitlement to a rebate under section 159SZ is unaffected by their entitlement to the offset [item 4, new section 61-70] .

10.16 Contributions made on behalf of a spouse are not taken into account in calculating the offset, although these may qualify the taxpayer for a rebate under section 159T of the ITAA36.

10.17 The amount of personal contributions taken into account is reduced by the amount of the contributions that are deductible under section 82AAT of the ITAA36. [Item 4, new subsection 61-55(2) Step 4 in the Method statement]

5. Netting of savings and investment income and superannuation contributions

10.18 Net savings and investment income and undeducted superannuation contributions are effectively added together to determine the amount on which the offset is calculated. To obtain the offset the sum must be positive [Item 4, new subsection 61-55(2) Step 5 in the Method statement] .

6. Trustees

10.19 Certain trustees may also be entitled to the offset in their capacity as trustee. These are trustees who are liable to be assessed and pay tax on a share of the trust estate's net income under subsection98(1) of ITAA36 because the beneficiary presently entitled to that share is under a legal disability.

10.20 If the beneficiary is a resident individual, the trustee is entitled to an offset of 15% of the share (7.5% in 1998-99), up to a maximum of $450 ($225 in 1998-99). The trustee is so entitled in respect of each legally disabled beneficiary that is a resident individual. If a beneficiary is a beneficiary of more than one trust, where the trustee is assessed under subsection98(1), each trustee is entitled to the offset. [Item 4, new section 61-65]

7. Claiming the offset

10.21 The offset will be first available in assessments for the 1998-99 income year [item 14] . To obtain the benefit of the offset before assessment, provisional tax taxpayers may vary their provisional tax, and PAYE taxpayers may reduce the amount of tax instalments deducted from their salary and wages.

10.22 To limit the need for a provisional tax taxpayer to lodge a variation form in respect of his or her 1998-99 provisional tax, provisional tax for that year will be calculated as if the taxpayer was entitled to the offset in his or her 1997-98 assessment. However, the offset will be calculated only on net savings and investment income and at the 7.5% rate. [Item 16]

10.23 A transitional provision also ensures that 1999-2000 provisional tax is calculated on the basis of the offset being available at the 15% rate, rather than the 7.5% rate that will apply for 1998-99. [Subitem 15(3)]

10.24 The provisional tax provisions of the ITAA36 will also be amended to ensure the offset is taken into account in determining a taxpayer's liability to provisional tax. [Items 9 to 13]

8. Technical issues

10.25 The insertion of a new Subdivision into the ITAA97 necessitates updating the navigational aids for readers contained in that Act. Accordingly, the offset table in Division 13 is updated to reflect the new Subdivision [items 1 to 3] , and new definitions of 'RSA' and 'savings and investment income' are included in the Dictionary in section 995-1 of the ITAA 1997 [items 5 and 6] .

10.26 The Bill also inserts new provisions into the ITAA36 to allow for the proper interaction between the ITAA36 and the ITAA97 in respect of rebates, credits and tax offsets. [Items 7 and 8, new sections 160ADA and 160AHA]

10.27 The term 'tax offset' is used in the ITAA97 to describe things that may be either 'rebates' or 'credits' under the ITAA36. However, most of the 'rebates' and 'credits' in the ITAA36 have not yet been rewritten into the ITAA97.

10.28 Under the ITAA36 the amount of a rebate or credit to which a taxpayer is entitled is generally limited to the amount of tax (or Australian tax) payable by the taxpayer (sections 160AD and 160AO of ITAA36). To ensure that this rule similarly applies in respect of tax offsets available under the ITAA97, the Bill inserts two new provisions into the ITAA36. These treat tax offsets under the ITAA97 as rebates for the purposes of the ITAA36, unless the tax offset corresponds to a provision of the ITAA36 that provides for a credit, in which case the offset is treated as a credit for the purposes of the ITAA36.

9. Example of savings tax offset

Harry was employed as an architect until 31 December 1999. For the remainder of the year he runs his own business. Harry's taxable income is calculated as follows:

Harry also made personal superannuation contributions to an employer sponsored superannuation scheme of $1,000. Harry's entitlement to the offset for the 1999-2000 income year would be calculated under the Method statement in new subsection 61-55(2) as follows: