House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP and the Minister for Health and Aged Care, the Hon Dr Michael Wooldridge, MP))

Chapter 5 - Tax offset

Explanation of the amendments

5.1 The amendments contained in Schedule 2 to the TLA(PHI) Bill will insert new Subdivision 61-H in the ITAA 1997 to provide a tax offset for persons who take out or maintain private health insurance and make other consequential changes necessary to make the offset a refundable tax offset. Schedule 1 of the TLA(PHI) Bill makes consequential changes to the ITAA 1936.

5.2 The offset is designed to mirror as closely as possible the incentive payments scheme in the PHII Bill. Hence the entitlement to the offset is largely determined by reference to entitlement to private health insurance incentive payments under that Bill as outlined in Chapter 3 above.

Amendments to the ITAA 1997

New Part

5.3 Item 11 of Schedule 2 inserts new Subdivision 61-H which comprises new sections 61-330 to 61-345 . The Subdivision determines entitlement to the offset and the amount of the offset. [New section 61-330]

Private health insurance tax offset is a refundable offset

5.4 The amount of the offset as calculated in accordance with the new scheme is a refundable offset. This means that the full benefit is passed on by refunding the amount, if any, by which that benefit exceeds tax assessed. This would apply to persons who have a relatively small amount of tax assessed. A refundable offset operates in a similar way to tax instalment deductions. A taxpayer's tax instalments deducted during the course of the year are applied against the tax assessed and any surplus is refunded to the taxpayer. The refundable tax offset rules are contained in new Division 67 . [New subsection 61-335(6)] See paragraphs 5.27 and 5.28 below.

Entitlement to the private health insurance tax offset

5.5 Subject to the one exception detailed below, the private health insurance tax offset is available only to individuals. It is not available to individuals in their capacity as an employer. In circumstances where an employer pays for private health insurance on behalf of an employee as a fringe benefit, then it is the employee who will be entitled to the offset. Generally, two conditions must be satisfied for an individual to be eligible for the tax offset in an income year. [New subsection 61-335(1)]

5.6 Firstly, the individual, or the individual's employer, as a fringe benefit, must pay a premium or an amount in respect of a premium under an appropriate private health insurance policy as defined in the PHII Bill, discussed above at paragraph 3.6. The amount paid can be in respect of cover under the policy for the 1998-99 or any later income year. [New subsection 61-335(2)]

5.7 This means that where, say, an individual pays a premium for cover in respect of more than one income year or parts of more than one income year the offset will be calculated by reference to the total amount of the premium paid for that cover. An offset will be allowed in an income year even where the amount paid is in respect of cover for that income year and/or any other income year. In these circumstances, the successive application of the calculation provisions in new section 61-340 may be required to calculate the actual offset amount in an assessment for an income year.

5.8 The need for the amount of the offset to be calculated in respect of cover for each year of income arises because each amount needs to be compared to the annual benefit under the PHIIS scheme where an eligible person may be entitled to that annual benefit.

5.9 Secondly, for an offset to be allowed in an assessment for an income year, the premium must be paid in that income year. The exception to this rule is where the premium was paid prior to the 1998-99 income year. Where an individual paid a premium before that income year (and the premium was in respect of cover after on or after 31 December 1998) the offset is allowed in the 1998-99 income year. [New subsection 61-335(3)]

5.10 Trustees who are liable to be assessed under section 98 of the ITAA 1936in respect of a share of a trust estate are entitled to the offset if the beneficiary who is presently entitled to that share of the trust estate would be eligible for the offset if his or her taxable income was limited to that share. [New subsection 61-335(4)] Section 98 of that Act provides for the assessment of trust income where the presently entitled beneficiary of that income is under a legal disability.

5.11 However, a taxpayer is not entitled to an offset under this scheme:

•

if an incentive payment has already been paid under Chapter 2 of the PHII Bill [new paragraph 61-335(5)(a)] ; or

•

if the payment has already been reduced by the premium reduction scheme in Chapter 3 of the PHII Bill [new paragraph 61-335(5)(b)] ; or

•

in respect of any premium attributable to a period before 1 January 1999. [New subsection 61-340(7)]

Example 1: incentive payment already received

On 15 April 1999 Tracey spends $1,000 on a 6 month premium for hospital and ancillary cover. She is taking out health insurance for the first time and claims an incentive payment of 30% of $1,000 ($300). When Tracey lodges her tax return for the 1998-99 income year, she cannot claim an offset for this amount as she has already received the benefit as an incentive payment.

Example 2: premium for cover before 1 January 1999

Brendan paid a premium on 1 December 1998 for cover which expires on 30 November 1999. He is not entitled to an offset under the new scheme for that part of the premium which relates to the period before 1 January 1999.

Amount of the tax offset

5.12 As the offset is designed to mirror as closely as possible the incentive payment available under the PHII Bill, the amount of the offset will be equal to the amount of the incentive payment that an eligible person would have been entitled to in respect of that policy.

5.13 Where the taxpayer was registered or entitled to be registered under the PHIIA 1997, the offset available to the taxpayer is the greater of either 30% of premiums paid or an incentive amount equal to that available under the former scheme. This ensures the benefit available to a taxpayer is no less than that which would have been available under PHIIS had a person been registered or entitled to be registered in respect of a policy under that scheme in the 1998-99 financial year. The incentive amount is worked out under new section 61-345 (see paragraph 5.27).

5.14 The offset is available in respect of the premium paid or an amount paid in respect of a premium either by the taxpayer or by the taxpayer's employer where that payment is a fringe benefit.

5.15 The calculation provision for the offset is divided into two parts. Where the premium paid is in respect of cover for the 1998-99 income year new subsections 61-340(1), (2) and (3) will apply. The amount of offset where the premium paid is in respect of cover for later years is determined by new subsections 61-340(4), (5) and (6) .

5.16 Where there is no person registered or eligible to be registered before 1 January 1999 in respect of the relevant policy under the PHIIA 1997,the calculation is the same irrespective of whether it was in respect of amounts paid in respect of cover for the 1998-99 or later income years. [New subsections 61-340(2) and (5)]

5.17 The amount of the offset is 30% of the amount paid for cover in respect of each year of income.

Example 3: premiums paid and person not registered, or entitled to have been registered under the Private Health Insurance Incentives Act 1997

Ken and Helen have an appropriate private health insurance policy that covers them and their dependent child, Penelope. However, because of income tests, they were not entitled to any incentive amount under the PHIIA 1997. This means that the incentive payment to which Helen is entitled, as the person who pays the premiums, is 30% of the premium; she cannot receive the incentive amount if this was greater because she was never entitled to an incentive under the former scheme.

5.18 Where there is such a person registered or eligible to be registered, the calculation for cover in respect of the 1998-99 year is different from the calculation for later years.

5.19 A person would be eligible to be registered before 1 January 1999 if he or she satisfies the eligibility criteria and had started to pay premiums before that date. The person may not have so registered because he or she intended to claim the tax offset under Subdivision 61-G of the ITAA 1997.

5.20 For the 1998-99 income year the amount of the offset is the greater of:

•

30% of the amount paid or the amount that would have been payable if the premium had not been reduced under PHIIS in respect of cover for that year; and

•

the annual incentive amount in relation to the policy (see paragraph 5.27) for that year. [New subsection 61-340(3)]

Example 4: premiums paid in the 1998-99 income year

Natalie has a policy which provides both hospital and ancillary cover for herself and her children. She paid a six-monthly premium for the period 1 September 1998 to 28 February 1999, and was entitled to be registered under the PHIIA 1997for the 1998-99 income year. However, she was not registered and did not receive a premium reduction. The gross amount of the premium was $950.

Under the new scheme, Natalie is entitled to claim an offset under new Subdivision 61-H in respect of the premiums she paid for cover from 1 January 1999. Natalie will be entitled to an offset under Subdivision 61-G of the ITAA 1997 for that part of the premium that relates to the period before 1 January 1999. To work out how much offset she is entitled to for cover from 1 January 1999 she must compare her entitlement in respect of the policy under both the former and new schemes. Natalie can claim the greater of:

(i)

30% of $950 * 59/365 ($46.05); and

(ii)

$450 * 59/365 ($72.70).

Natalie would, therefore, be entitled to claim an offset of $72.70 under the new scheme for the period 1 January to 28 February 1999.

5.21 For all later years of income the amount of the offset is the greater of:

•

30% of the amount paid in respect of cover for the year; and

•

the annual incentive amount in relation to the policy (as set out in paragraph 5.27) for the year. [New subsection 61-340(6)]

5.22 As set out above, the successive application of the calculation provisions of new section 61-340 may be required to calculate the actual offset amount in an assessment for an income year where, say, an amount is paid that is for cover in respect of two or more income years.

5.23 In all calculations, amounts paid that relate to cover before 1 January 1999 are to be disregarded. [New subsection 61-340(7)]

5.24 Under new subsection 61-340(8) the amount of offset which a taxpayer can claim must be reduced by the amount of any premium reduction they received under the PHIIS.

Example 6: offset to be reduced by premium reduction

If Susan was notionally entitled to an offset of $375 because of the operation of new subsections 61-340(1) to (7) but had received a premium reduction of $100 under the former scheme, then the amount of offset which she is entitled to claim is reduced to $275.

5.25 Items 9 and 10 of Schedule 2 make some minor changes as a result of new Subdivision 61-H . The first amends the heading relating to the offset available under the PHIIA 1997 and the second makes a signposting change.

5.26 Item 15 of Schedule 2 inserts a definition of incentive amount into the ITAA 1997 Dictionary.

Meaning of incentive amount

5.27 New subsection 61-345(1) provides a meaning for the term incentive amount . This is the same as the annual incentive amounts included in section 5-4 of the PHIIA 1997. The amount of the incentive depends on whether premiums are paid for the whole or part of the financial year:

•

if the premiums are paid for the whole of the financial year the incentive amount is as follows:

•

if the premiums are paid for part of a financial year the incentive amount is calculated on a pro rata basis. The amount is calculated using the formula in new subsection 61-345(2) . The result of the formula is that the full year incentive amount applicable to the circumstances is apportioned according to the amount of the year (ie. number of days) the premiums cover.

Refundable tax offset rules

5.28 Item 14 of Schedule 2 inserts new Division 67 which sets out the rules about refunds of tax offsets. This is explained in new section 67-10 . New section 67-20 makes it clear that new Division 67 will not apply unless an offset is stated as being subject to new Division 67 .

5.29 New subsection 67-25(1) explains that a person can get a refund in relation to a tax offset if the amount of the offset exceeds the amount of income tax the person would have to pay if that person had not got the offset and had not got any tax offsets of a higher priority (the order of priority is shown in new subsection 67-25(2) ). The operation of new Division 67 is demonstrated in the following example:

Example 7: order in which offsets are taken into account

Tax liability before taking offsets into account	$1,000
Private health insurance tax offset	$600
Other tax offsets	$900

Under new subsection 67-25(1) the other offsets must be taken into account first because they are of a lower priority than the private health offset as per new subsection 67-25(2) . After taking into account other offsets, the tax liability is reduced to $100. After then taking into account the private health insurance offset, the taxpayer is entitled to a refund of $500. [New subsection 67-30]

Impact on tax payable of a refundable tax offset

5.30 Item 1 of Schedule 2 makes a change to section 4-10 of the ITAA 1997. The section explains how to work out how much income tax a person must pay and is amended so that where an offset exceeds tax assessed the excess can be refunded in certain circumstances.

5.31 Items 2 and 3 of Schedule 2 insert new subsection 4-10(3A) to explain that if a private health insurance tax offset exceeds a person's tax liability, after allowing for other tax offsets, they are entitled to a refund of the excess.

5.32 Item 12 of Schedule 2 revises the list showing the order in which offsets are taken into account in determining any offset amount to be carried forward under Division 65.5.33 Item 13 of Schedule 2 makes a signposting amendment.

List of tax offsets

5.34 Item 4 of Schedule 2 amends the table in section 11-15 which is an index of exempt income, to include a private health insurance incentive payment.

5.35 Item 5 of Schedule 2 adds the private health insurance offset contained in new Subdivision 61-H to the list of offsets in section 13-1.

Exempt payments

5.36 In order to exclude from a person's assessable income incentive payments received under Chapter 2 of the PHII Bill, item 7 of Schedule 2 amends the heading of Subdivision 52-D and item 8 of Schedule 2 inserts new section 52-125 to make it clear that an incentive payment is exempt from income tax. Item 6 of Schedule 2 makes a technical correction by amending the Table of Subdivisions in section 52-1 to include a reference toSubdivision 52-D.

Amendments to the Income Tax Assessment Act 1936

Information exchange

5.37 Item 1 of Schedule 1 amends paragraph 16(4)(fb) to allow the Commissioner, a Second Commissioner, a Deputy Commissioner or an authorised officer to disclose information to the HIC they are otherwise required to keep secret under subsection 16(2). The disclosure of this information has to be for the purpose of the administration of the PHII Bill.

5.38 Item 5 of Schedule 1 inserts new section 264BB , which mirrors section 264B that was inserted with the introduction of the PHIIA 1997 to assist the Commissioner in ensuring compliance with the tax offset. Under new section 264BB the Commissioner can ensure that taxpayers claiming the offset in fact hold private health insurance. Without the ability to match data provided by health funds, the cost to the community of ensuring compliance would be greatly increased and may make such compliance action uneconomic.

5.39 Other than the taxpayer, health funds are the only source of information concerning private health insurance and the amendment will allow the Commissioner to require health funds to provide information in respect of both the PHIIA 1997 and the new scheme.

Separate net income

5.40 An incentive payment received under the PHII Bill will be excluded from the definition of separate net income in subsection 159J(6) in the same fashion as an amount of child care assistance or child care rebate is excluded. Item 2 of Schedule 1 inserts new paragraph 159J(6)(aac) in the definition to make it clear that such an amount is not to be taken into account in determining a person's eligibility for dependant rebates or the amount of such a rebate to which they are entitled.

Time period for amending assessments

5.41 Item 3 of Schedule 1 inserts new paragraph 170(10AA)(n) to give the Commissioner the ability to amend an assessment at any time in order to allow an offset for private health insurance under new Subdivision 61-H of the ITAA 1997.

Provisional tax

5.42 The offset will be available on assessment only, and so will not be taken into account when calculating provisional tax. This was also the case with the offset available under the PHIIA 1997. Item 4 of Schedule 1 amends subsection 221YCAA(2A) which provides that the private health insurance offset calculated under either Subdivision 61-G or new Subdivision 61-H of the ITAA 1997 is not to be taken as a rebate for the purposes of the definition of qualifying reductions in relation to calculating the uplifted provisional tax amount under section 221YCAA. Taxpayers desiring a periodic benefit from the scheme can apply for an incentive payment or select the option of having a premium reduction to avoid any delay in receiving the incentive.